The City of Rochester, New York, and its former finance director Rosiland Brooks-Harris have denied all wrongdoing following the Securities and Exchange Commission’s June complaint that the city, Brooks-Harris and the former Rochester City School District CFO mislead investors and provided outdated financials in connection with a $119 million bond offering in 2019.
In a separate complaint, the Commission also charged municipal advisory firm Capital Markets Advisors and its co-principals Richard Ganci and Richard Tortora with breaching its fiduciary duty and failing to disclose conflicts of interest. A telephonic hearing for all defendants for the purpose of entry of a case management order, which includes the city, Brooks-Harris, CMA, Ganci and Tortora, took place Monday morning and the results will be filed with the clerk’s office within the week.
“The SEC’s claims against the City and Brooks-Harris should be dismissed in whole or in part because the City and Brooks-Harris did not make any false statements or omissions and cannot be held responsible for false statements or omissions made by the District or others,” the defendants said in a filing. The response also raised ten other defenses, which included the contention that the alleged misstatements or omissions were not material, that the defendants had no duty to disclose the information alleged, that they acted in good faith and that they acted in reliance on the district, among others.
“The City and Brooks-Harris demand a jury on all issues triable by jury,” the response said. “Wherefore, the City and Brooks-Harris demand judgment dismissing the SEC’s complaint and granting such other and further relief as this Court deems just and proper, including costs and disbursements.”
CMA and Ganci submitted their response at the end of August and moved to dismiss the charges against them. Lawyers familiar with the matter said the charges against CMA and its co-principals are unprecedented for the SEC, as nothing in the current law states that a municipal advisor who represents a city must force the city’s school district to open its books and records to ensure their statements are accurate.
The matter arose when the district overspent its fiscal year 2019 budget by $27.6 million and required a $35 million loan from the State of New York in addition to the appointment of a monitor, the SEC alleged.
Signs of ill financial health began to appear in late-2019 when Moody’s Investors Service dealt a two-notch downgrade to A2 from Aa3 and assigned a negative outlook to the city, citing major budget struggles in the city’s school district, which also prompted an SEC investigation.
The city and Brooks-Harris were aware of the budget shortfalls prior to the 2019 offering and municipal advisor Richard Ganci warned that the district’s spending imbalance could become worse.
They made no effort to investigate the extent of the overspending and made no effort to inform investors of the risks its financial situation posed, the SEC alleged.
In complaints filed in federal court in New York, the SEC claims that the offering documents for the city’s August 2019 offering of both bond anticipation and revenue anticipation notes were materially misleading by stating the district’s spending was within budget for the fiscal year when it was really experiencing significant financial distress.
The SEC’s complaint against the city, Brooks-Harris, CMA and Ganci charges them with violating antifraud provisions but also charges CMA, Ganci and Tortora with violating the municipal advisor fiduciary duty.
The SEC also charged former Rochester City School District CFO Everton Sewell, and he agreed to settle by consenting, without admitting or denying any findings, to a court order prohibiting him from future violations of the antifraud provisions and from participating in future municipal bond offerings. He agreed to pay a $25,000 penalty.
The city of Rochester and Brooks-Harris denied almost all of the 122 paragraphs of accusations, accepting only certain inarguable factual assertions.
The city and Brooks-Harris’ attorney Brian Feldman did not immediately respond to requests for comment.