Largest California Water District Agrees to Pay Fee for Misleading Investors

The SEC settled charges against the general and assistant managers of California's largest water district for misleading investors about the district's financial condition before the issuance of a $77 million bond offering. The SEC order (the "Order") stated that the "negligent conduct" of the managers, which violated Section 17(a)(2) of the Securities Act, was "imputed" to the district.

Specifically, the Order found that the general and assistant managers:

• misled investors on the debt service coverage ratio of the district,

• failed to disclose relevant information to investors about revenue and coverage ratios, and

• failed to disclose two accounting transactions that were implemented in order to avoid raising water rates, which allowed the district to meet the debt service coverage ratio of 1.25 that was reported in the "Official Statement for the 2012 Bonds" (as opposed to the debt service coverage ratio of 0.11 that would have been reported if the two accounting transactions were disclosed at the time).

In addition, the Order noted that during the public board meeting at which the undisclosed transactions were discussed, the general manager made an alarming joke and confession:

"[we are engaged in] a little Enron accounting. . . . We're not collecting any more money from the rate payers, nor are we paying any more money than we would otherwise pay under that the . . . um . . . to pay off the debt. All we're doing is, we're taking money and saying we are reclassifying it from an account payable to income."

The district agreed to pay $125,000 to settle the charges, which makes this the second case in the history of SEC enforcement actions in which a municipal issuer consented to a financial penalty. The general manager and assistant manager also agreed to pay additional penalties of $50,000 and $20,000, respectively.