Who’s Afraid of the SEC?

I apologize in advance if this blog gets a little technical but here it goes. I also would like disclosure that I am not an expert in SEC reporting requirements but I have done plenty of research over the past week on this matter.

Municipal Bonds are a way to raise money, much like a home mortgage, when a municipality doesn’t have enough cash to pay for various items that they would like to build, buy, renovate, etc. Currently, The Village of Palmetto Bay currently has over $14.6 million in Municipal Bonds outstanding which were floated, I assume, to pay for various capital expenditures (i.e. Village Hall).
Municipal Bonds, much like stocks and commodities, are publicly traded and have certain reporting requirements and guidelines dictated by the Securities and Exchange Commission (SEC.) The SEC has put these requirements into effect to protect investors to give them the opportunity to understand and be fully informed when they are purchasing a publicly traded investment (think Enron, Lehman Brothers).

Rule 15c2-12 is the SEC rule that dictates Municipal Bonds reporting requirements. It was adopted in 1989 and expanded greatly to protect investors by detailing disclosure requirements upon the issuance of Municipal Bonds and on an ongoing basis after the primary offering and during secondary trading. This rule focuses on disclosure misrepresentations and omissions.

The disclosure requirement for the financial condition of the particular Municipality that is issuing bonds is concerned with its Annual Financial Statements. These are the same Financial Statements I discussed on my last blog that seem to have a material misrepresentation.
  
So what does this mean and how does it affect the Village?

If something material is not disclosed by the Village that could affect someone’s decision whether or not to purchase Palmetto Bays Municipal Bonds, that omission is a violation of SEC Rule 15c2-12. The whole reason there is an SEC is to protect investors from mis-information perpetrated by the people who create financial instruments so that prudent investor s can have access to the reliable information necessary to make an informed decision on their investments. For example, pending litigation that could result in a significant judgment against a Municipality might very well be one of those SEC violations.

The Village of Palmetto Bay is currently engaged in litigation, with a potential judgment against it in excess of 12 Million Dollars. Based on the Village’s own financial reports, this exceeds the Village reserves. This is probably a fact that a prudent investor would like to know prior to purchasing Village of Palmetto Bay bonds since an unfavorable judgment could significantly affect bonds ratings and trading value.

While the litigation has been mentioned in the Villages Financial Statements, it has been downplayed “in the opinion of management and legal counsel” as not having a “material adverse effect on the financial position of the Village.” I would assume that the SEC would feel strongly that the amount of potential litigation should be disclosed on the Villages Financial Statements. I would also assume by not disclosing the potential litigation as material, the Village exposes itself to SEC fines and future litigation from bond holders if the Village was ordered to pay Palmer Trinity a substantial sum of money.

Furthermore, the SEC rules allow for there to be personal liability up to $150,000 in fines each for elected officials and staff members who knowingly perpetrate a misrepresentation in Financial Statements. This is a clever way to keep elected officials and staff from feeling free to act outside the law by assuming they can hide behind a municipal legal shield. Their $150,000 fines won’t pay the whole tab for the wrong-doing, but it certainly should be enough tough medicine to keep council and staff on a straight and narrow path.

So it seems it’s best for Mayor, Council, Village Manager, Village Attorney and staff to err on the side of disclosure – too much information to the public is much better than not enough. When the full faith and credit of our Village is at stake due to the obstructionist attitude of Mayor Stanczyk, Councilwoman Lindsay, and Village Management, the SEC can help us. It would be prudent for the Council to act on this matter soon to determine if they need to disclose the magnitude of a potential judgment against the Village as a material liability. One never knows what could happen if the SEC shows up with financial microscopes.

Something doesn't add up in the Village's Annual Financial Report

In my previous life for 7 or 8 years I was an auditor.  An auditor is usually a CPA who reviews and verifies accounting records for public, private or governmental agencies. 

I’ve had a the opportunity to review the Comprehensive Annual Financial Report that was presented to the Mayor, City Manager, and Council at the last Council meeting on April 1^st .  I found what seems to be a glaring and possibly material error in the way litigation is reserved and footnoted.

One would think that pending litigation would be material if the ultimate cost to the Village of Palmetto Bay was, say, a million dollars, but somehow the firm auditing the Village of Palmetto Bay did not find or may not have been given accurate information regarding pending litigation between Palmer and the Village, and pending litigation between Shores of Palmetto Bay and Palmetto Bay. 

The direct quote by the auditor in the Report under the heading Litigation is :  “The Village is involved in several lawsuits incidental to its operations, the outcome of which, in the opinion of management and legal counsel, should not have a material adverse effect on the financial position of the Village.”

I’m sure everyone is thinking, we know there is litigation occurring between Palmer Trinity and the Village, and Shores of Palmetto Bay and the Village, so what is the issue? 

The issue is that Audits and auditors have guidelines to follow.  These guidelines may be foreign to the lay person but are important because they require litigation to be handled in a specific manner on an Audited Financial Statement. (Not to get too technical, but the wonks among you might agree that public and government audits as they relate to litigation contingences must follow SFAS No. 5, GASB No. 62 and GASB No. 10.) 

So what if guidelines weren’t followed and the financials are misstated - then what?  The Mayor and the Council should demand to find out why.  First, was it the auditing firm that made the error?  Was it the Village Manager or Finance Director?  Was it the Village Attorney?    The auditing firm, Cherry Berkaert, is only responsible for the information that is presented to them by various sources within the Village during the Audit.  That’s why all Auditors require a Representation Letter to be signed by the Auditee, in this case, the Village of Palmetto Bay. Note that the auditor makes the determination that litigation is not material based on the opinion of management and legal counsel

The Auditors are required to send out what is called an Attorney Confirmation to all law firms who have been paid during the year to find out what type of litigation is occurring in the Village and what effect it may have on the Finances of the Village.  In this case, I would hope that our Village Attorney Eve Boutsis received and sent one back.  If not the auditing firm has some, as Ricky Ricardo once said to Lucy, some serious “esplaining to do”.

With millions of dollars at stake should this information been handled differently on the Comprehensive Annual Financial Statement?  Once again, did the Village Attorney fill out the Attorney Confirmation completely, honestly and accurately?   

A Million Dollar judgment or settlement with either of these Plaintiffs does, in my opinion (and any sensible universe,) have a materially adverse effect on the financial position of the Village.    Is the Village once again not being open and honest?  Did the Village Staff, specifically the Village Manager or Village Attorney, mislead the auditors or is it just incompetence?

Regardless of the reason, the record needs to be set straight and if needed the Comprehensive Annual Financial Report corrected.  I call upon the Mayor and Council to investigate as these are their Financial Statements.  In the mean time it’s important that the Council set up a Board of Financial Advisors to keep this from happening again.  Our Village, without a doubt, could call to service any number of financially seasoned resident-professionals to assist with the Financials and help the Village weave through numbers and guidelines to get the budget and reporting finally in order.

David Singer

A Hat Trick at the April Council Meeting

Last night's Council meeting was relatively uneventful with the exception of Mayor Shelley Stanczyk scurrying out of the chambers so fast that she forgot to close the session.  In fact, she left so quickly after the final vote that she looked like a roach being chased by a can of RAID.    Besides the fact that I reminded the Mayor and the Village Attorney that they repeatedly disregard Roberts Rules at Council Meetings, which is required by the Village of Palmetto Bay Code of Ordinances, the only stimulating portion of the meeting was during "Other Business".   There were five items brought forward for discussion during "Other Business" which benefit the residents of Palmetto Bay greatly when passed.  Both Mayor Shelly Stanczyk and Councilwoman Joan Lindsey voted or would have voted against the majority of these items.   Three of them were passed and two were tabled.  The first two that were passed were revisions to the NPO that would give residential and non-residential structures the right to rebuild using the same zoning codes originally in place when the structures were built if they were to be damaged more than 50%.   In other words, as I have been discussing for the past six months, if your home, school or a church were to burn down you could in theory build the exact same structure on your property.     Why Mayor Shelley Stanczyk and Councilwoman Joan Lindsey voted against either of these two items I have no clue, unless they are hoping that a major hurricane will destroy either a private school or a church in the community, and they would like to have a law in place preventing them from rebuilding.  It's just their blatant disregard for property rights.   One of the items which was tabled, which I can't imagine why Mayor Stanczyk and Councilwoman Lindsey were prepared to vote against it (it will be brought up again at the next meeting), is the creation of a Financial Advisory Committee made up of Palmetto Bay residents who are CPA's, and CFO's.   In case you don't know, the Village has a bevy of committees: Educational; Special Events; Zoning; Thalatta Estates; Historic Preservation and even a Tree committee.     When John DuBois introduced the idea of having residents, who are seasoned professionals, specializing in Finance, Accounting or Business give advice to the Council, Mayor Stanczyk and Councilwoman Lindsey were so repulsed by it you would think that they were being asked to join a swinger's club.    It's mind boggling that they spent a good deal of time discussing members of a tree committee last night but refused to even consider formation of a financial advisory board whose objective would be to help the Council in auditing selection, budgeting and other financial matters that could have a material impact on the residents of Palmetto Bay.    So much for the Mayor's "open and transparent government."   What exactly are Mayor Shelly Stanczyk and Councilwoman Joan Lindsey trying to hide from the public that the other three Councilmembers are willing to disclose?      The final vote was related to a solicitation of proposals for the position of Village Attorney. We all remember Ms. Eve Boutsis, our current Village Attorney, as she is the one responsible for overseeing procedures, including Robert's Rules, during Council Meetings and, in my opinion, has done this Village a grave injustice by fighting the release of the Palmer Trinity shade sessions that will eventually damage both Mayor Stanczky and Councilwoman's Lindsey's credibility.    Attorney Boutsis continues to play politics in her position instead of looking out for the residents of Palmetto Bay interests.   Fortunately the final vote was tallied and the request for solicitation for proposals for Village Attorney was passed. Mayor Stanczyk, without further adieu, "exited stage left," "adios'ed like a ghost" and left the building before you could spell "RAID".  I guess there was no reason for her to hang around and chit-chat after a 0-for-3 night.  Hooray for the Citizens rights. David Singer