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SEC imposes rare, and record, penalty on municipal bond issuer


(Reuters) — The U.S. Securities and Exchange Commission on Wednesday fined a municipal bond issuer for only the second time, accusing California’s largest agricultural water district of overstating its financial health when it sold bonds.

The Westlands Water District, which serves Fresno and Kings counties in central California, agreed to pay a record $125,000 penalty to settle SEC civil charges over its $77 million bond sale in October 2012.

Two individuals settled related charges. The district’s general manager Thomas Birmingham, 60, of Sacramento, will pay a $50,000 penalty, while former assistant general manager Louie David Ciapponi, 64, of Fresno, will pay $25,000, the SEC said.

None of the defendants admitted wrongdoing. Neither Westlands nor a lawyer for the defendants immediately responded to requests for comment.

SEC Chair Mary Jo White has made it a priority to ensure that rules are followed in the market for municipal securities, which are often bought by older investors, including retirees.

The SEC accused Westlands of falsely representing in bond offering materials that its debt service coverage ratio, the ratio of revenue to debt service payments, had exceeded 1.25-to-1 in each of the last five years.

According to the SEC, Westlands had learned in 2010 that drought conditions would keep it from achieving that ratio, and decided to reclassify $9.8 million of reserves as revenue to meet the ratio, to avoid raising rates for customers.

Birmingham, the SEC said once, joked at a Westlands board meeting that the reclassifications involved “a little Enron accounting” to reach the desired ratio.

But for the reclassifications, and separate undisclosed adjustments made in 2012, Westlands’ debt coverage ratio for 2010 would have been 0.11, not 1.25, the SEC said.

Westlands’ undisclosed accounting transactions “benefited customers but left investors in the dark about Westlands Water District’s true financial condition,” Andrew Ceresney, director of the SEC enforcement division, said in a statement.

Enron Corp. was a Houston energy company that collapsed into bankruptcy in a 2001 accounting scandal.

The SEC first fined a municipal bond issuer in November 2013, in a case from Washington state.

In that case, the SEC fined the Greater Wenatchee Regional Events Center Public Facilities District $20,000 for misleading investors about prospects for an ice rink for which it sold $41.8 million of bonds in 2008. The district defaulted in 2011.