SEC Says South Miami Defrauded Investors

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On Wednesday, officials of the U.S. Securities and Exchange Commission said that the city of South Miami, Florida had defrauded investors by not properly informing them about the tax-exempt status of two bond deals. The two deals questioned by the SEC totaled $12 million and were placed through the Florida Municipal Loan Council.

The city settled with SEC without admitting or denying any allegations against its conduct. The city also agreed to retain an independent consultant to oversee any municipal bond disclosures.

According to the SEC, the city acted inappropriately and put the tax-exempt status of both bond deals in danger by loaning out the proceeds from the first bond deal to a private developer, and by restructuring a lease agreement related to the parking structure related to the second bond deal before its sale.

  

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Elaine Greenberg, chief of the Municipal Securities and Public Pensions Unit in the SEC Enforcement Division, said in a statement, “South Miami’s fraudulent conduct put bondholders in danger of incurring significant additional costs associated with their investments.”

Stressing the fact that investors usually accepted lower interest rates on municipal bonds because the interest payments are exempt from taxation, Greenberg said, “tax-exempt status of municipal bonds is vitally important to bond investors, and we will closely scrutinize any conduct by issuers or others that threatens that tax exemption.”

In fact, the tax-exempt status of municipal bonds is one of the biggest reasons for existence of the $3.7 trillion municipal bond market. Both finance advisors and investors rely on exemption from state and federal taxes for financial planning.

This is the second municipal bond fraud-enforcement action by the SEC this month. In the earlier action, the SEC charged Harrisburg, Pennsylvania for committing fraud.