City Securities Defrauded Municipal Issuers, Made Illegal Gifts And Gratuities To Public Officials: Where Are The Criminal Charges?

City Securities, the most influential investment banking firm in Indiana based in Indianapolis, and the former head of its public finance division, Randy Ruhl, entered a settlement agreement regarding multiple securities law violations it was alleged to have committed in a civil enforcement action brought by the Securities and Exchange Commission. City Securities has agreed to pay a fine of $580,000. Ruhl has agreed to pay a fine of $38,475 to settle an individual enforcement action against him, along with a one-year suspension of his securities license and a permanent bar from supervising others in the brokerage and investment industries.

The audit findings contained in the order issued today, while focused on civil enforcement actions, detail wrongs that implicate serious criminal law violations by the firm and its senior employees, which begs the question as to why no criminal charges have been brought. The findings detailed in today's order implicate serious acts of public corruption if proven, including: underwriting public offerings that contained material misrepresentations; defrauding taxpayers by billing expenses from bond proceeds not permitted by law; and making illegal gifts and gratuities to public officials involved in municipal bond offerings.

Today's order only makes reference to wrongdoing related to one particular bond offering, a $31 million public bond issue of the West Clark Community Schools in 2007. "City Securities conducted inadequate due diligence and, as a result, failed to form a reasonable basis for believing the truthfulness of material statements in an issuer’s official statement, which resulted in City Securities offering and selling municipal securities on the basis of a materially misleading disclosure document," the order reads. According to the order, this is the first time a securities firm has been cited for this type of violation.

“This is the first time the SEC has charged a municipal issuer with falsely claiming in a bond offering’s official statement that it was fully compliant with the annual disclosure obligations it agreed to in prior offerings, and an underwriter and its principal for not doing the necessary research to attest to the truthfulness of that claim,” said Andrew Ceresney, Co-Director of the Division of Enforcement.  “West Clark Community Schools defrauded bond investors by leading them to believe that it had provided the annual financial information contractually required in a prior bond offering, when in fact for five years they failed to submit the required information.  This case demonstrates that we will be vigilant in making sure municipal issuers and underwriters comply with their obligations.”

The other more troubling violations, however, don't appear to be specific to the work City Securities performed for the West Clark Schools. According to the order, City Securities and Ruhl illegally sought and obtained reimbursement from the bond proceeds for expenses it ran up wining and dining representatives of the municipal bond offerings on which it served as underwriter. These expenses were illegally billed to the issuer as "printing, preparation and distribution of official statement" as far back as at least 2007. Quoting verbatim from the order:

For example, during the relevant time period, various Department employees requested, and Ruhl approved reimbursement from City Securities, for expenses relating to charitable donations, entertainment and travel. Examples include the following:

a. Numerous reimbursements for mileage, hotels and entertainment relating to issuers;

b. A donation of $2,500 to a charity favored by an issuer;

c. A donation of $1,500 to an educational scholarship favored by an issuer;

d. $1,000 to sponsor of a golf outing hosted by an issuer; 

e. $2,500 to sponsor an education foundation event hosted by an issuer which featured a “Colts Town Hall” breakfast with high profile professional football players from the Indianapolis Colts; and

f. Reimbursement for 12 Chicago White Sox tickets.

According to the order, the municipal bond issuers were unaware that City Securities was billing these entertainment expenses back to the issuer. They probably weren't asking those questions either. After all, City Securities donates very generously to public officials who reward them with public finance work. Elaine C. Greenberg, Chief of the Enforcement Division’s Municipal Securities and Public Pensions Unit, added, "City Securities abused its role as municipal underwriter by fraudulently obtaining reimbursement from bond proceeds for expenses unrelated to the issuance of bonds." "Moreover, City Securities violated MSRB rules by providing representatives of municipal securities issuers with valuable and excessive gifts such as multi-day golf trips and tickets to various sporting events." The order detailed those violations as follows:

During the relevant time period, City Securities provided improper entertainment, gifts and gratuities to various municipal securities issuers. (emphasis added) For example, City Securities authorized:

a. Frequent and excessive gifts and gratuities to representatives of one school district within a four-month period in 2007, including approximately $1,500 in catering expenses for a lunch and an evening dinner reception at an event to celebrate the installation of a new superintendent; approximately $800 for travel expenses for a multi-day out-of-state golf trip, including airfare, car rental and meals; and another $140 for an overnight golf trip including hotel stays;

b. Approximately $1,250 for a group outing to a Chicago Cubs baseball game for six issuer officials and their guests which was not attended by representatives from City Securities; and

c. In excess of $200 for two issuer officials and their guests to attend a Notre Dame football game, which again was not attended by representatives from City Securities.

Either a federal or state prosecutor should be able to read today's order and conclude that it summarizes activities involving possible violations of various federal and state criminal statutes governing public corruption. It seems that U.S. Attorney Joe Hogsett and Marion Co. Prosecutor Terry Curry have some explaining to do if neither follows up today's civil enforcement action with criminal investigations.

According to Indiana's campaign finance database, City Securities has contributed about $30,000 in recent years to various candidate, party and political action committees in Indiana. The firm's president, Michael Bosway and his spouse, Elizabeth, have contributed nearly $29,000. Those contributions don't include generous campaign contribution made to campaign committees of Indianapolis Mayor Greg Ballard, former Mayor Bart Peterson or Carmel Mayor James Brainard. City Securities' directors include politically-connected individuals, including Mark Miles, Mark Lubbers and John Biddinger. You may recall that City Securities was involved in advising the City of Indianapolis regarding some of those bond swap agreements that cost Indianapolis taxpayers dearly. The firm has also acted as a revolving door employer for former Indianapolis Bond Bank employees who helped steer work to the firm.