SEC accuses the City of Rochester and former city and school executives of misleading investors

City sold $119 million of bonds to investors without disclosing financial distress

The City of Rochester, New York, its former finance director Rosiland Brooks-Harris, and former Rochester City School District CFO Everton Sewell have all been accused of deceiving investors in a $119 million bond issue by the Securities and Exchange Commission. The SEC also accused Capital Markets Advisors, LLC (CMA), Rochester’s municipal advisor, and Richard Ganci, CMA’s principal, of deceiving investors and failing in their fiduciary obligation to Rochester. Additionally accused of failing to disclose conflicts to municipal clients were CMA, Ganci, and CMA co-principal Richard Tortora.

The federal agency’s complaint accuses the defendants of violating the antifraud provisions of the securities laws. The SEC is seeking “injunctive relief and financial remedies” against all of the parties involved.

The SEC asserts that the defendants defrauded investors in 2019 by including out-of-date financial statistics for the Rochester City School District in bond offering documents and failing to disclose that the district was in financial difficulties as a result of excessive spending on teacher salaries. Sewell allegedly knew the district would experience a budget shortfall of at least $25 million, but he misled a credit rating agency about the size of the anticipated shortfall. The Rochester City School District’s increased financial distress, which included overspending on teacher salaries, is another allegation made by the SEC against Brooks-Harris and Ganci. Despite this, the SEC claims that neither of them made any effort to learn more about the district’s financial situation prior to the bond offering, nor did they alert investors to the risks that the overspending posed to the district’s finances.

The district’s auditors found that the district had exceeded its budget by over $30 million in September 2019, 42 days after the offering, which led to a downgrading of the city’s debt rating and necessitated the involvement of the state of New York.

The SEC’s complaint also alleges that CMA, Ganci, and Tortora failed to disclose to nearly 200 municipal clients that CMA had material conflicts of interest arising from its compensation arrangements. In many cases, CMA, Ganci, and Tortora falsely stated that CMA had no undisclosed material conflicts of interest.

“We allege that the Rochester City School District’s financial health was important to investors, who were counting on the district as the expected source of repayment,” said LeeAnn Ghazil Gaunt, Chief of the Enforcement Division’s Public Finance Abuse Unit. “As described in our complaint, these defendants failed to inform investors of the serious financial difficulties the district was experiencing at the time of the offering.”

Sewell agreed to settle the SEC’s charges 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 securities offerings, and to pay a $25,000 penalty. The settlement is subject to court approval.