SEC Charges South Miami with Fraud over Debt Deals

The city of South Miami, Florida, defrauded investors by not disclosing problems with the tax-exempt status of two bond deals, U.S. securities regulators said on Wednesday in their second municipal bond fraud-enforcement action this month.

The U.S. Securities and Exchange Commission said the city agreed to settle the fraud charges and retain an independent consultant to oversee its municipal bond disclosures.

The city settled without admitting or denying the SEC allegations. South Miami's city manager was not immediately available to comment.

The two deals at issue, so-called conduit bonds that were used to finance a mixed-use retail and parking structure, totaled $12 million and were made through the Florida Municipal Loan Council.

Because the city loaned proceeds from the first offering to a private developer and restructured a lease agreement related to the parking structure before the second sale, it put the tax-exempt status of both bond deals in jeopardy, the SEC said.

Tax-exempt status is a valued advantage for municipal bonds. Investors generally will accept lower interest rates on such bonds because the interest payments are exempt from federal and state taxation.

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

"The 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."

The SEC has limited authority over the $3.7 trillion municipal bond market. But in recent months it has begun cracking down on issuers about providing bond buyers with accurate and timely information.

Less than three weeks ago, the commission brought landmark charges against the Pennsylvania capital city of Harrisburg. After failing to release annual financial disclosures, the city leaders committed fraud by glossing over money problems in public speeches and presentations, according to the SEC.