SEC accuses Sweetwater schools and former CFO of filing false financial reports

Federal regulators on Thursday announced charges against the Sweetwater Union High School District and its former chief financial officer for filing false reports of around tens of millions of dollars in municipal bonds.

The 11-page complaint filed by the U.S. Securities and Exchange Commission accused former public servant Karen Michel of promoting inaccurate budget projections and misleading investors into a $ 28 million bond offer in 2018.

Michel approved the disclosures saying the district would close the fiscal year with around $ 19.5 million, when in fact it was engaged in significant deficit spending and on track for a negative closing fund balance of 7. , $ 2 million, regulators said.

Much of the spending was due to a 3.75% salary increase approved in 2018, which the district did not budget properly, the SEC said.

The district was the subject of a 9-page ordinance instituting a cease-and-desist order from future violations and agreeing to implement a series of reforms to avoid misrepresentation of public offerings to the district. ‘to come up.

“As the order finds, Sweetwater and Michel presented outdated and misleading financial information as being up to date and accurate,” said LeeAnn Gaunt, head of the Public Finance Abuse Unit in the Division of Enforcement.

“The SEC will continue to fight deceptive behavior that prevents municipal bond investors from having an accurate picture of the financial risks of their investments,” she said.

The Sweetwater Union High School District issued a statement that largely spelled out the terms of the settlement.

“This settlement resolves all of the SEC’s outstanding claims against the district and represents another positive step in the district’s ongoing remedial efforts to continuously assess and improve its fiscal health,” the statement said.

“The district looks forward to implementing the improvements and changes outlined in the SEC ordinance,” he concluded. “It will continue to take steps to ensure it provides accurate disclosures and information to the public.”

Michel, who resigned in 2018, did not respond to emails or phone messages.

The district and the former chief financial officer settled their case without admitting or denying the allegations, the SEC said.

Michel agreed to pay a fine of $ 28,000 and no longer participate in future securities offerings. The agreement remains subject to the approval of a federal judge.

The settlement with the district requires officials to hire an independent consultant to assess their policies and procedures related to municipal bond disclosures.

Within six months, the district must also establish appropriate and complete written policies for future disclosures of obligations.

He also agreed to hire an independent consultant to prepare a written report reviewing the financial statements. This report will not be made public, the SEC said, because it is likely to contain confidential financial information.

But the district is required to adopt all of the independent expert’s recommendations within 90 days, except those that the council deems unduly burdensome, impractical or inappropriate.

Michel had been a district veteran for nearly 20 years when she was appointed interim CFO in 2013. Her appointment followed the brief tenure of Albert Alt, who had been hired from a northern California district earlier. this year.

According to federal regulators, Michel ran Sweetwater’s bond program and was authorized to sign all required documents on behalf of the district.

“Michel or others acting under his direction were primarily responsible for providing Sweetwater’s financial information in support of the bond offering,” the SEC order says. “From February to April 2018, they repeatedly provided misleading provisional budget projections to the credit rating agency and potential bond investors.”

Sweetwater’s chief financial officer provided inaccurate information to investors and the public even though she knew it was incorrect, regulators said.

“At no time before or after the bond offering (Michel) or Sweetwater revealed to the rating agency that actual spending was significantly higher than the projections contained in the first and second interim reports,” said said the SEC.

The bonds were subsequently given an A rating as experts told investors they expected reserves to exceed the minimum fund balance by 2% and that the district would actively manage its spending to cover budget deficits. potentials.

Michel retired around September 2018, and the new CFO quickly learned of budget variances totaling millions of dollars, the SEC said.

The 2017-18 salary costs alone were nearly $ 19 million higher than previous estimates, and the general fund balance fell to about $ 2.9 million negative, regulators said.

“The audited financial statements revealed an even worse general fund balance at the end of the year, negative $ 7.2 million based on a total deficit of about $ 28.7 million,” said the DRY.

The Sweetwater Union High School District has an average daily attendance of about 36,000 students at more than two dozen college and high school campuses throughout the South Bay.

The public body is governed by an elected five-member board of directors that oversees a current-year budget of approximately $ 505 million and approximately 3,500 employees.

The neighborhood has a history of financial irregularities.

Ten years ago, investigators from the district attorney’s office executed search warrants at the homes of four of the five board members.

In early 2012, then-prosecutor Bonnie Dumanis announced 26 felony charges against a large number of current and former Sweetwater officials accused of being involved in a widespread pay-to-play scandal.

Most of the school board members have been dismissed or resigned. The former superintendent was found guilty and sentenced to more than seven months in prison.

Most recently, the school board fired then superintendent Karen Janney in August 2020 – two months after state auditors found evidence of potential financial fraud in the district.

Janney was rehired in 2015 to help the district bounce back from its previous missteps.

The United States Securities and Exchange Commission is a regulator, which means it can impose monetary penalties and revoke licenses for misconduct.

Its regulatory findings can be forwarded to the FBI or the US Department of Justice for criminal investigation.

The SEC acknowledged the assistance of the San Diego County Attorney’s Office in preparing its charges.


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Marianne R. Winn

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