UNITED STATES OF AMERICA
|In the Matter of
|ORDER MAKING FINDINGS
AND IMPOSING A CEASE-
The Securities and Exchange Commission ("Commission") instituted public cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent Cesar Odio ("Odio") on September 22, 1999.
Respondent Odio has submitted an Offer of Settlement ("Offer") to the Commission, which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission, or in which the Commission is a party, and without admitting or denying the findings herein, except as to the jurisdiction of the Commission over Respondent and over the subject matter of this proceeding and as to Section III.A., which is admitted, Respondent Odio by his Offer consents to the entry of findings and cease-and-desist order set forth below.
On the basis of this Order Making Findings and Imposing Cease-and-Desist Order ("Order") and the Offer submitted by Respondent Odio the Commission finds1 that:
A. At all relevant times, the City of Miami ("the City") was the largest municipality in Miami-Dade County, Florida. The City was governed by a five member commission and run by a chief administrative officer, known as the City Manager, who reported to the commission.
B. At all relevant times, Odio was the City Manager. As City Manager, Odio had full authority over the City's financial operations and the preparation of its annual budget.
The Fraudulent Offer and Sale of the Bonds
C. In June 1995, the City offered and sold, on a competitive bid basis, $22.5 million in general obligation bonds to pay for the cost of certain sanitary sewer improvements (the "Sewer Bond Offering" or "Sewer Bonds"). In August 1995, the City offered and sold, on a negotiated basis, $22 million in non-ad valorem revenue bonds to principally finance the City's acquisition of a new administration building, and to acquire and to pay for certain capital improvements to a City park (the "FPL Offering" or "FPL Bonds"). In December 1995, the City offered and sold, on a negotiated basis, $72 million in non-ad valorem revenue bonds to pay for certain of its annual pension and employee compensated absences obligations (the "Pension Bond Offering" or "Pension Bonds").
D. The Official Statements for all three offerings (collectively referred to as the "Bond Offerings") contained the City's fiscal year 1994 audited general purpose financial statements. Also contained in the Official Statements, by incorporation, was a certification located in the Closing Documents (the "anti-fraud certification") stating that the Official Statements were free of misstatements and omissions of material fact, and that there had been no material adverse change in the City's financial condition since the close of the prior fiscal year. Odio executed the anti-fraud certifications for the Sewer, FPL, and Pension Bond Offerings. Contained in the Sewer and FPL Offering Official Statements was the adopted fiscal year 1995 general fund budget.
E. On or about September 1995, the City mailed its Comprehensive Annual Financial Report for fiscal year 1994 ("1994 CAFR") to broad segments of the investing public. In mailing the 1994 CAFR, the City targeted the investment community, including government and municipal securities dealers, investment banking firms, credit rating agencies, bond insurers and individuals. The City also provided the 1994 CAFR to federal, state and local governments, as well as to public and university libraries. The 1994 CAFR contained a Letter of Transmittal dated February 28, 1995, which was signed by Odio. The 1994 CAFR also contained the City's fiscal year 1994 audited general purpose financial statements.
F. The City's financial condition began to materially decline after the close of fiscal year 1994 and continued to worsen through December 1995. Specifically, the City's cash position had deteriorated to the point where the City faced the very credible prospect of being unable to meet its operating expenses through fiscal year 1995. Odio was keenly aware of the City's dire economic situation.
G. The Official Statements failed to disclose the City's financial condition to investors at the time of the Bond Offerings. Specifically, the City omitted to state that its cash position had materially declined since the close of fiscal year 1994 and that serious consequences could result, including being unable to pay its operating expenses and debt service in fiscal year 1995, if its cash position did not significantly improve. The Official Statements also failed to disclose that Operation Right-Size, a program designed to significantly reduce City expenditures, while necessary, might not have been sufficient to remedy the City's immediate economic problems. In addition, the Pension Bond Offering Official Statement failed to disclose that the Pension Bonds were issued in order to address the City's "immediate cash flow requirements." Absent these disclosures, the Official Statements did not reveal the City's true financial condition to investors.
H. The statements made in the anti-fraud certifications contained in the Closing Documents, and by incorporation, in the Official Statements, that no material adverse change in the City's finances had occurred since the close of the prior fiscal year, and that the Official Statements contained no omissions or misrepresentations of material fact, are false in light of the City's true financial situation at the time of the Bond Offerings.
I. The only discussion in the Official Statements, which even alludes to the City's cash problems, is found in a footnote to the financial statements. That footnote states that as of September 30, 1994 the City "experienced cash deficits in several of its operating funds which were temporarily remedied by loans from other funds", and that the City intended to replenish these cash deficits through the anticipated savings to be generated by Operation Right-Size. The footnote also states that "[t]he implementation of the [Operation Right-Size] proposals ... are expected to strengthen the City's financial condition." This footnote, located in a section principally addressing the City's proprietary funds, does not sufficiently disclose to investors the nature and gravity of the City's financial situation. Specifically, it omits to state that: (a) the City's cash position had materially declined since the close of fiscal year 1994, (b) the City faced the prospect of being unable to meet its operating expenses in fiscal year 1995 absent significant improvement in its cash position and (c) Operation Right-Size -- a direct result of the City's deteriorating finances -- although necessary, may have been insufficient to remedy the City's immediate cash flow problems.
J. The City's 1994 CAFR also failed to disclose the City's deteriorating financial condition to the market place about previously issued City debt. Besides the same footnote to the financial statements, which was also contained in the Official Statements, the only disclosure contained in the 1994 CAFR that arguably addresses the City's financial problems is found in the Letter of Transmittal. In the Letter of Transmittal, the City merely repeats verbatim that portion of the footnote, which discusses Operation Right-Size and its anticipated savings. Like the footnote contained in the financial statements, the Letter of Transmittal does not disclose the true nature and gravity of the City's financial situation.
The Fiscal Year 1995 Budget Fraud
K. In formulating its fiscal year 1995 budget in the summer of 1994, the City faced a $15.8 million general fund budget deficit. Through increases in property taxes, and additional revenues from licenses and permits and the sale of landfill, the City was able to reduce partially the budget deficit by $6.8 million. However, not having sufficient revenues to solve the remaining $9 million budget deficit, and not wanting to take the politically unpopular move of cutting expenses, the City, through Odio, balanced the fiscal year 1995 budget by including approximately $9 million in revenues from the Violent Crime Control and Law Enforcement Act of 1994 (the "Crime Bill"), federal legislation which authorized funding to local, state and federal governments to fight crime. The City's approximate $9 million Crime Bill revenue projection was based upon a municipal lobbying group report issued in May of 1994 indicating that Miami could expect to receive $9,003,862 from the Local Partnership Act, a block grant provision of the Crime Bill. At that time, the Crime Bill legislation being considered by Congress provided that all the block grant monies under the Local Partnership Act would be paid in a lump sum in fiscal year 1995. However, the final version of the Crime Bill, signed into law by the President on September 13, 1994, reduced funding under the Local Partnership Act and provided that payments would be made over five years commencing in fiscal year 1996. Notwithstanding these material changes which made it certain that the City would not receive the $9 million in fiscal year 1995, the City passed the fiscal year 1995 budget, which included the $9 million in Crime Bill revenues, on September 22, 1994, nine days after the President had signed the Crime Bill into law.
L. Odio knew, or was reckless in not knowing, prior to the City's adoption of the fiscal year 1995 budget, that the block grant funding provisions of the Crime Bill had changed and, as a consequence, the City would not receive the $9 million -- representing approximately 57% of the $15.8 million general fund budget deficit -- in fiscal year 1995 and therefore did not have a balanced budget. The Crime Bill projected revenues were included in the general fund budget figures (breakdown of revenues and expenditures) contained in the Official Statements in both the Sewer and FPL Offerings, which were provided to investors. Thus, the Sewer and FPL Offering Official Statements falsely represented that the City had achieved a balanced budget for fiscal year 1995.
Odio's Participation in the Fraudulent Bond Offerings
M. Odio, acting through the City, knowingly and/or recklessly failed to disclose the City's deteriorating financial condition in the Official Statements. Odio knew that the City's cash position had materially declined from the close of the prior fiscal year and that there was a very credible possibility that the City would not meet its operating expenses in fiscal year 1995, yet approved the Official Statements which failed to disclose this fact. Odio also knew that the anti-fraud certifications he executed were false. Further, Odio signed the Letter of Transmittal contained in the 1994 CAFR which failed to disclose the City's true financial condition. Moreover, Odio knew or should have known prior to the passage of the proposed fiscal year 1995 budget that the City would not receive the $9 million from the Crime Bill in fiscal year 1995 and thus did not have a balanced budget.
N. Based upon the aforesaid conduct, Odio committed or caused, violations of, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in that, in connection with the purchase and sale of certain securities, namely the Sewer Bonds, FPL Bonds and Pension Bonds, as well as the City's other previously issued and outstanding bonds, by use of the means and instrumentalities of interstate commerce and by use of the mails, Odio, directly and indirectly, employed devices, schemes, and artifices to defraud; made untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and engaged in acts, practices and a course of business which would and did operate as a fraud and deceit.
O. Based upon the aforesaid conduct, Odio committed or caused, violations of, Section 17(a)(1) of the Securities Act, in that, in the offer and sale of certain securities, namely the Sewer Bonds, FPL Bonds and Pension Bonds, by the use of the means and instruments of transportation and communication in interstate commerce and by use of the mails, Odio, directly and indirectly, employed devices, schemes and artifices to defraud.
P. Based upon the aforesaid conduct, Odio committed or caused, violations of, Sections 17(a)(2) and 17(a)(3) of the Securities Act, in that, in the offer and sale of certain securities, namely the Sewer Bonds, FPL Bonds and Pension Bonds, by the use of the means and instruments of transportation and communication in interstate commerce and by use of the mails, Odio, directly and indirectly, obtained money or property by means of untrue statements of material facts and omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and engaged in transactions, practices and a course of business which would and did operate as a fraud and deceit upon the purchasers and prospective purchasers of such securities.
In view of the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by Odio and impose the following cease-and-desist order:
IT IS ORDERED, pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") that Respondent cease and desist from committing or causing any violation and any future violation of Sections 17(a)(1), 17(a)(2) and 17(a)(3) of the Securities Act and Section 10(b) of the Exchange Act, and Rule 10b-5, thereunder.
For the Commission, by its Secretary, pursuant to delegated authority.
Jonathan G. Katz
|1||The findings herein are not binding on anyone other than Odio.|
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