The Securities and Exchange Commission has charged Crosby Independent School District in Texas and its former chief financial officer Carla Merka with misleading investors in a $20 million municipal bond sale, in addition to charging district auditor Shelby Lackey with improper professional conduct in the district’s 2017 fiscal year financial statements.
Crosby ISD has agreed to settle the Commission’s charges by consenting to the order finding it violated antifraud provisions, without admitting or denying any findings. Following the SEC’s complaint against Merka filed in the U.S. District Court for the Southern District of Texas, she agreed to pay a $30,000 penalty and not participate in any future municipal securities offerings.
Lackey agreed to settle with the SEC, without admitting or denying any findings, by agreeing to a suspension from appearing before the SEC as an accountant for three years, with the right to apply for reinstatement. She also agreed not to serve as an engagement manager, engagement partner or engagement quality control reviewer connected to any audit to be posted to the Municipal Securities Rulemaking Board’s EMMA system until reinstated by the SEC.
The $20 million of municipal bonds were sold in order to pay the district’s outstanding construction liabilities and fund new capital projects, the SEC said. Crosby ISD failed to report $11.7 million in payroll and construction liabilities and falsely reported having $5.4 million in general fund reserves in its audited FY 2017 financial statements, the SEC found.
“Crosby ISD and Merka, who was responsible for Crosby ISD’s accounting and was the primary contact during the bond financing process, were aware that the financial statements significantly underreported the payroll and construction liabilities,” the SEC complaint said.
Crosby ISD raised $20 million through the sale of munis in January 2018, in which the official statement included 2017 audited financial statements that failed to report the outstanding $11.7 million in payroll and construction liabilities. “When these misstatements were discovered, Crosby declared financial exigency and the bonds were downgraded,” the SEC said.
But the 2017 misstatements stem from a 2013 bond sale whose projects grew in scope. Crosby ISD issued $86.5 million in municipal bonds in 2013 but knew that various project enhancements beyond the original scope exceeded what was initially planned for the projects.
“Consequently, the 2013 bond proceeds were prematurely exhausted in fiscal year 2016 leaving the General Fund as the only source of funding for approximately $12 million of remaining construction commitments,” the SEC said.
The district and Merka then knew the General Fund lacked the roughly $12 million to cover construction expenses. They responded by changing the district’s year-end date to June 30 from Aug. 31, in addition to issuing new municipal bonds.
The 2017 financial statements then failed to record construction expenses for completed capital projects and failed to record payroll expenses for unpaid teachers’ salaries.
In a June 26, 2017 call with Merka, Crosby ISD’s bond counsel and auditor concluded that the district could not pay outstanding construction costs without issuing new bonds. But Merka still failed to accurately record construction expenses by $7.9 million, recording a construction liability of $727,000.
In moving its fiscal year end to June 30, Crosby ISD also concluded its 2017 fiscal year with unpaid payroll obligations. The district then understated payroll expenses by $3.8 million, incorrectly reporting only a $30,000 payroll liability.
Merka then falsely asserted that the 2017 financial statements were presented in accordance with GAAP and that the District’s net position and fund balance had been properly reported, the SEC order said. She left the district in 2018.
The district’s auditor Lackey had then failed to obtain sufficient audit evidence to confirm the completeness and accuracy of the 2017 financial statements. “Lackey only reviewed one pay application from Crosby’s construction vendor and incorrectly interpreted a critical line item to represent the total amount due to that vendor,” an SEC order said.
“Crosby and Merka misled municipal bond investors regarding the truth of Crosby’s financial health and Shelby Lackey’s deficient auditing practices further exposed investors to harm,” said LeeAnn Gaunt, chief of the division of enforcement’s public finance abuse unit
“The SEC is committed to holding bad actors in municipal securities offerings accountable for their misconduct and will continue to provide protections for investors,” said David Peavler, regional director of the SEC’s Fort Worth Regional Office.