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Front Page » Business & Finance » Fraud charges rock Miami credit ratings

Fraud charges rock Miami credit ratings

Written by on August 8, 2013

When federal regulators leveled securities fraud charges last month against the City of Miami and its former budget director, it renewed longstanding concerns about the city’s financial controls that could set up Miami to take a hit to its credit ratings.
So far, however, credit rating agencies have not downgraded the city’s ratings for bond offerings — with one agency citing the city’s improved financial condition as a potential buffer against any potential fines or other penalties from the US Securities & Exchange Commission.
However, other rating agencies have given the city a “negative” outlook, with one saying, aside from the current SEC case, the city’s ratings face other “downward pressures” such as decreasing revenues and fixed-cost pressures.
If the city’s bond ratings are downgraded, it could hurt its ability borrow money or make it more expensive to do so.
The city, meanwhile, said it will dispute the charges.
“The city intends to vigorously defend against such charges and has not changed its position stated in prior material event notices filed on this subject matter,” officials said in a recent statement.
Ratings agencies said they are keeping a close watch on the case.
Fitch Ratings said the city’s financial progress in recent years tempers the risk of the SEC charges.
“We believe the city’s strengthening finances enhance its ability to accommodate any potential monetary penalties arising from the SEC,” Fitch said last week.
“Our credit focus will center on the magnitude of the financial penalty that could be imposed and its effect on city operations,” Fitch said.
Fitch said the charges will not result in an immediate rating action. However, it said the case “underscores our concerns about the city’s budgetary management and oversight, internal controls, and propensity for turnover of the city’s senior finance administrators.”
The city already is under a cease-and-desist order from 2003 based on similar violations of anti-fraud provisions. Because of those violations, the new fraud charges may increase the severity of a penalty should a court rule in favor of the SEC.
Fitch noted that none of the senior finance administrators at the time of the disputed transfers are now employed by the city.
Still, Fitch said, “the city’s history of frequent managerial turnover raises questions regarding operational continuity, adherence to policy, institutional knowledge and cooperation with elected officials.”
The SEC filed a lawsuit July 19 charging the city and former Budget Director Michael Boudreaux with three counts of securities fraud. The SEC alleges they made “numerous material misrepresentations and omissions to investors” beginning in 2008 on three bond offerings in 2009 totaling $153.5 million.
The SEC claims the city and Mr. Boudreaux included false and misleading information in the city’s fiscal year 2007 and 2008 Comprehensive Annual Financial Reports that are distributed to broad segments of the investing public, including investors in previously issued city debt.
According to the SEC, Mr. Boudreaux orchestrated transfers from the city’s Capital Improvement Fund to its General Fund in order to mask increasing deficits in the General Fund, which is viewed by investors and bond rating agencies as a key indicator of financial health.
The SEC’s action also charges the city with violating an SEC cease-and-desist order issued in 2003 based on similar misconduct. The agency said this is the first time the SEC has alleged further wrongdoing by a municipality subject to an existing cease-and-desist order.
“Miami actively marketed the bonds to the investing public while hiding the true reason for interfund transfers to boost the image of its primary operating fund,” George Canellos, co-director of the SEC’s Division of Enforcement, said in a statement.
“The fact that a city official would enable these false and misleading disclosures to investors merely a few years after Miami had been reprimanded by the SEC for similar misconduct makes this repeat behavior all the more appalling and unacceptable,” Mr. Canellos said.
In a response to the SEC suit on the city’s website, Miami Mayor Tomás Regalado called the allegations “unfounded” and “baseless.”
The mayor said the city disclosed all relevant information and that the transfers were reviewed and approved by the city’s outside auditors. He also said that ratings agencies were aware of the budget situation.
Last year, Moody’s Investors Service placed the ratings of more than $668 million in city bond obligations on review for possible downgrade. The action came after the city filed a material events disclosure about a notification from the SEC’s enforcement staff that it intended to recommend that the SEC file fraud charges against the city in connection with the bond offerings now in question.
“During the review,” Moody’s said, “Moody’s will determine whether the issues identified by the SEC are known to us and have been incorporated into our analysis of city’s finances. We will also assess the potential monetary penalties or other consequences of the SEC’s final decision, and the impact these could have on city’s finances, debt position or market access.”
In response to the recent the SEC suit, Moody’s issued a report calling the charges a “credit negative event” that could eventually prompt the firm to downgrade the city’s ratings.
In addition, Moody’s noted the case could result in significant financial penalties and gave the city a “negative” outlook.
Also following the SEC suit, Standard & Poor’s issued a statement saying the firm will continue to monitor the case, but its ratings on Miami’s bonds will not be immediately affected.
Still, Standard & Poor’s believes “downward pressure exists,” credit analyst Le T Quach said on, “and the negative outlook reflects our view of this ongoing issue as well as other downward pressure on the ratings, including Miami’s decreasing revenues, low financial position, and continued fixed cost pressures.”