UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Securities Act of 1933
Release No. 7895 / September 22, 2000
Securities Exchange Act of 1934
Release No. 43325 / September 22, 2000
File No. 3-10022
|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 Manohar Surana ("Surana") on September 22, 1999.
Respondent Surana 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 are admitted, Respondent Surana by his Offer consents to the entry of findings and the 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 Surana the Commission finds1 that:
- 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.
- At all relevant times, Surana was the City's Director of Finance and Assistant City Manager. In that capacity, he oversaw the Finance Department, which was responsible for, among other things, accounting and budget. Surana had direct involvement in and responsibility for the preparation of the City's fiscal year 1995 financial statements and the fiscal year 1995 Budget.
- 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").
- 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. Surana executed the anti-fraud certifications for the Pension Bond Offering. Contained in the Sewer and FPL Offering Official Statements was the adopted fiscal year 1995 general fund budget.
- 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. The 1994 CAFR also contained the City's fiscal year 1994 audited general purpose financial statements.
- 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 prospect of being unable to meet its operating expenses through fiscal year 1995. Surana was aware of the City's dire economic situation.
- 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.
- 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.
- 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.
- 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.
- In formulating its fiscal year 1995 budget in the summer of 1994, the City included 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.
- Surana 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 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.
- Surana, acting through the City, recklessly failed to disclose the City's deteriorating financial condition in the Official Statements. Surana was aware that the City's cash position had materially declined from the close of the prior fiscal year and that there was a possibility that the City would not meet its operating expenses in fiscal year 1995, yet approved the Pension Bond Official Statement which failed to disclose this fact. Surana was reckless in not knowing that the anti-fraud certification for the Pension Bond Offering was false when he executed it.
- Based upon the aforesaid conduct, Surana caused violations 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.
In view of the foregoing, the Commission deems it appropriate to accept the Offer submitted by Surana and impose the following cease-and-desist order:
IT IS ORDERED, pursuant to Section 8A of the Securities Act and Section 21C of the 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.
By the Commission.
Jonathan G. Katz
||The findings herein are not binding on anyone other than Surana.