SEC Case Highlights The Sensitivity Of Public Workers Serving As Financial Advisors

By Cyril Tuohy

InsuranceNewsNet

It was only a matter of time before the Securities and Exchange Commission (SEC) took action against a public body for allegedly misleading investors about public financing.

Now, for the first time, it has done so.

The SEC’s case against the Greater Wenatchee Regional Events Center Public Facilities District is the first time that the agency has assessed a financial penalty against a municipal issuer, according to the SEC. The Greater Wenatchee district is in the city of Wenatchee, Wash.

Mark Zehner, deputy chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit, told The Wall Street Journal in an interview that the SEC is “happy to go against sloppy, negligent conduct if need be.”

The role of Allison Williams, since 2005 director of executive services for the city of Wenatchee, highlights the sensitivity of a public official serving in an advisory role for another municipal organization in the spending of public tax dollars. Williams also had no financial background.

Williams was “on loan” from the city of Wenatchee to the Greater Wenatchee district. She was asked to serve in her district role by a former mayor of the city of Wenatchee.

“In the course of signing off on some documents she was caught in the SEC’s crosshairs,” said George Greer, an attorney representing the city of Wenatchee, for which Williams still works.

Greer said that Williams felt that she was simply providing a service and that she had no intention of being negligent or mishandling her district duties. The district has its own financial advisors, including the investment bank and Minneapolis-based broker-dealer Piper Jaffray & Co.

Peter Fraley, an attorney representing the public facilities district, declined to comment, and separate messages left with Global Entertainment and Piper Jaffray were not returned.

In the annals of alleged public misspending, this case involves relatively small sums. Each of the fines levied against individual defendants named in the SEC complaint are only $20,000. 

To be sure, Williams, a community planner in the Department of Community Development from 1998 to 2005, wasn’t the only one named. The SEC is limiting the scope of its penalties to a “cease-and-desist” order along with “remedial sanctions” against the named parties — the Greater Wenatchee Regional Events Center Public Facilities District, Williams, and Richard Kozuback, chief executive officer of Global Entertainment, and separately against Jane Towery, an investment banker, along with her employer Piper Jaffray & Co. The city of Wenatchee isn’t a party to the dispute.

The Wenatchee story remains a cautionary tale about the responsibilities of public officials -- appointed with the best of intentions, or perhaps because of personal or political connections -- who land in an advisory capacity with important fiduciary implications.

In 2006, Wenatchee and neighboring municipalities joined to form the district to run a “multipurpose event center,” with the city taking on responsibility for managing the development and construction of the center.

The district also sought help from city staff.

Williams was the senior staff member for the district and primary contact for the developer, attorneys, underwriters and independent consultants, according to the SEC. She was given the title of contracts manager, becoming the “liaison officer” between the city and the district.

Despite doubts expressed on two occasions by an outside consultant in 2006 and 2007, and again by the district’s bond underwriter in 2008 about projected cash flows presented by the Glendale, Ariz.-based developer, Global Entertainment, the district financing team “pushed forward with the bond issuance,” according to SEC examiners. The district financing team was composed of Williams, bond counsel and the district’s initial underwriter

Williams “actively participated in the process” by supplying information used in the Preliminary Official Statement for the bond issuance, the SEC said. She also participated in due diligence conference calls, and commented on Preliminary Official Statement drafts, the SEC said.

The statements, on which Piper Jaffray relied to buy $41.77 million in bond anticipation notes (BAN) in November 2008 so that the city could begin paying the developer, were “materially false and misleading,” according to the SEC.

Williams and the former mayor, who themselves had questioned Global Entertainment’s projections in 2008, and asked Global to supply rosier numbers, never disclosed those facts in the Preliminary Official Statement.

Nor did the body of the Official Statement make any reference to Wenatchee’s loan obligations, which would be limited by the city’s remaining debt capacity of $19.3 million, according to the SEC. The explanation was instead relegated to an appendix of the document – hardly the adequate disclosure necessary for any reasonable investor, the SEC said.  

When it came time to close on the BANs, Williams executed a Closing Certificate of the District, which once more attested that the Official Statement was free of misleading statements and that no material facts were omitted from it, the SEC also said.

Would Williams have made different decisions had she been a municipal bond counselor, or had she been properly registered with the SEC? It’s hard to say.

But the case illustrates how public officials thrust into a position with little public or regulatory oversight, and why proponents of stricter municipal market regulation believe there is a need for advisors to register with the SEC.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].