The Riverhead Town financial advisory firm was named as a defendant in a federal fraud lawsuit filed by the Securities and Exchange Commission last week, alleging it knowingly misled investors in a $119 million municipal bond sale dollars for the city of Rochester in 2019.
Capital Markets Advisors, a Great Neck-based city councilor and consulting firm hired by the town of Riverhead in February 2016, and its executives, Richard Tortora, president, and Richard Ganci, executive vice president, face charges of civil fraud brought by federal regulators. for their role in the August 2019 Bond Sale for the City of Rochester on behalf of the City of Rochester School District. The city and its former chief financial officer were also named defendants in the lawsuit.
The lawsuit, filed June 14 in the U.S. District Court for the Western District of New York, alleges that the city, its chief financial officer Rosiland Brooks-Harris, CMA, Tortora and Ganci made materially misleading statements and omissions in the bond offering that hid the school district. deteriorated financial situation and masked the real risk for investors.
The SEC also accuses CMA, Tortora and Ganci of failing to disclose “material conflicts of interest” to its clients, which number up to 400 entities, over a period of several years.
Federal regulators allege that CMA and Ganci, along with the city and its chief financial officer, violated federal securities law against fraud in the offer or sale of securities. They also allege that CMA, Tortora, and Ganci violated federal regulations by engaging in deceptive, dishonest, or unfair practices, violating the duties of a city councilman, violating city councilors’ oversight and compliance obligations, and violating their fiduciary duties.
The consultants’ alleged conflict of interest stems from their fee arrangement, where their compensation is “dependent on the size and/or closing of a client’s transaction,” the SEC complaint alleges.
“The conflict arises because, although the client has an interest in going into debt as little as possible in order to satisfy his need for capital, the municipal councilor has an interest in increasing the amount of the client’s debt in order to increase his remuneration.
CMA’s consulting contracts, including its contract with the Town of Riverhead, specify this type of “contingent” compensation arrangement.
Not only did CMA fail to disclose the conflict, the complaint states, but its contracts affirmatively state that CMA has no material conflicts of interest to disclose.
Capital Markets Advisors denies the allegations.
“CMA and the City of Rochester plan to mount a vigorous defense and believe we will ultimately succeed,” a company spokesperson told RiverheadLOCAL yesterday.
Riverhead Town financial administrator William Rothaar said CMA’s “contingent” fee arrangement is typical of all financial advisers in the field. He said that in his 28 years in municipal finance, he had never seen a different compensation arrangement.
Rothaar said he was unaware of the underlying circumstances that gave rise to the lawsuit, but “CMA billing shouldn’t even be part of it.”
Riverhead supervisor Yvette Aguiar, the town official ultimately responsible for its finances, said she had already asked Rothaar to issue a request for proposals for a bond adviser and financial advisers before learning the SEC lawsuit.
“It’s been six years, so it’s about time,” Aguiar said yesterday.
Riverhead hired CMA following an RFP process launched in 2015. Prior to signing with CMA, Riverhead’s financial advisor was Munistat.
Rothaar said he is pleased with CMA and feels the company has served the city well.
A financial advisor assists the municipality with credit rating agencies, prepares a bond sale, prepares offering documents and offers securities for sale. The company and its officers must register with the Securities and Exchange Commission. CMA has been registered with the SEC since 2014. Tortora has served as chairman and director of the company since 2002, and Ganci has served as executive vice president and director since March 2005.
Lawsuit stems from Rochester City School District financial scandal
According to the SEC Complaint, the City of Rochester sold a $68,905,000 bond anticipation (“BAN”) note and a $50,000,000 revenue anticipation (“RAN”) note in August 2019 on behalf of the City School District.
The school district’s financial situation at the time of the sale was deteriorating. Its fund balances had declined by more than $27 million due to recurring operating deficits between 2014 and 2018. cash flow of $63 million due, in part, to the district’s overspending. “This was an unusually large decline in cash compared to previous years,” the complaint states. “To pay the expenses, the District began to rely more and more on the City for short-term loans.”
The city and its chief financial officer became aware of the school district’s financial issues in July 2019 and began meeting weekly with district financial staff. The CFO was aware of the district’s overspending in fiscal year 2019 “due to increased teacher salaries” and its $63 million cash shortfall, according to the complaint. The city decided to issue the notes to avoid making frequent short-term loans to the district.
The SEC said CMA has served as the city’s financial adviser since 2008 and Ganci has personal knowledge of city and district finances. Specifically, according to the complaint, he was aware of the district’s overspending and declining fund balance and unusual drop of $63 million, the complaint states. He also knew that the city issuing the notes was “largely” due to overspending by the district.
The defendants made “materially misleading statements and omissions” to a credit rating analyst prior to the offer, the complaint states. City and district officials told the analyst that the reason for the revenue anticipation notes was “simply to address a timing issue in receiving New York state aid,” says the complaint. “They did not disclose the district’s increase in overspending on teacher salaries.”
The district’s then-CFO made false statements to the analyst regarding the district’s planned use of the fund balance in 2019, the complaint says. He also incorrectly stated that the $63 million cash decline was “due to accounting treatment and timing issues.”
The city’s chief financial officer and CMA’s Ganci overheard the false statements to the analyst and failed to correct them, the complaint states. Nor did they reveal the district’s overspending on teacher salaries.
The credit analyst subsequently assigned the city its highest rating for short-term debt and maintained the city’s Aa3 rating for its general obligation debt.
The SEC alleges the city made misleading statements and omissions in its offer documents, providing the districts’ audited financial statements for fiscal year 2018, which were more than a year old at the time of the offer. Audited financial statements from the previous year did not reflect the district’s extreme cash flow crisis due to overspending in fiscal year 2019.
The city’s chief financial officer and CMA did not request more recent financial statements from the district, even though they were rewarded with the district’s financial difficulties, the complaint says.
The offering documents did not disclose the district’s projected year-end results for fiscal 2019, the complaint says, although that information is known to the city, its chief financial officer, CMA and Ganci. at the time of the offer.
The offering documents also incorrectly stated that proceeds from the revenue anticipation note would be used to offset the effects of timing differences between receipts and disbursements in fiscal year 2019-20, when the Ran’s show was motivated by the district. overspending and a growing need for cash, according to the SEC complaint.
The city sold the tickets and the deal closed on August 7, 2019.
On September 18, 2019, the district’s external auditor alerted district management that the district was facing a budget shortfall of $30 million for fiscal year 2019.
The actual operating deficit for fiscal year 2019 was found to be $42 million, according to audited financial statements completed in December 2019, due to an overrun of $27.6 million during the fiscal year. , which consumed the entire balance of the district’s “reserve policy” fund as well as $8.9 million in restricted reserves for other purposes, according to the SEC complaint.
The rating agency later downgraded the city’s long-term rating to ‘A2’ and assigned it a negative outlook. It also lowered the city’s rating for its bond anticipation rating.
In May 2020, New York State provided a $35 million loan to the Rochester City School District to fill the budget shortfall, and the state’s education commissioner appointed a comptroller to oversee the district during a period of three years from May 2020.
Rochester City School District former budget manager hired by Riverhead Schools
The Riverhead Central School District last month hired former Rochester School District budget director Rodney Asse as assistant superintendent of finance and operations. Asse served as the Rochester School District’s budget director from January 2017 until his resignation in September 2019, immediately after the multi-million deficit became public knowledge.
Asse came to the Riverhead School District from Liberty Central School District in upstate Liberty, New York, where he had been employed as a business manager. He was first hired on a daily basis, then appointed to a full-time position while Riverhead School superintendent Augustine Tornatore was Liberty’s superintendent.
In an interview last month, Asse said the Rochester school district’s chief financial officer and superintendent, who both resigned over reports of the financial situation there, were responsible for the district’s financial crisis. As district budget manager Asse said, he was not a member of the superintendent’s cabinet, which managed the district, including its finances. The CFO, he said, “would actually finalize and direct a budget and work with the superintendent.”
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