Skip to content

Enforcement Highlights

  • About Us
  • Contact
  • Cookie Policy
Enforcement
Highlights

Covering SEC, CFTC, FINRA, PCAOB, States, Exchanges, & FCA Enforcement Activities

SEC Charges Texas School District and Former CFO with Fraud Related to Bond

On March 16, 2022, the Securities and Exchange Commission charged Crosby (Texas) Independent School District (Crosby) and its former Chief Financial Officer, Carla Merka, with misleading investors in a $20 million municipal bond sale, which was issued to pay down outstanding construction liabilities and fund new construction projects.

The SEC’s civil complaint alleges that Crosby failed to disclose $11.7 million in payroll and construction liabilities in connection with the January 2018 sale. The complaint also alleges the school district falsely reported that its general fund had $5.4 million in reserves in its 2017 fiscal year financial statements. According to the Complaint, Merka, who had ultimate authority over Crosby’s fiscal year 2017 financial statements and was its highest-ranking executive with financial or accounting experience, was aware that Crosby’s financial statements significantly underreported its existing liabilities and that she knowingly included the statements in the bond offering documents. In August 2018, seven months after the bond sale, Crosby’s leadership disclosed its financial difficulties. The disclosure led to employee layoffs for the school district and the downgrading of Crosby’s bonds.

Crosby’s auditor, Shelby Lackey, was also charged with improper professional conduct in connection with an audit of the school district’s 2017 financial statements. Specifically, the SEC alleged Lackey violated the Generally Accepted Auditing Standards (GAAS) by failing to obtain adequate evidence to verify Crosby’s payroll and construction liabilities, failing to supervise the audit, and failing to exercise professional judgment and maintain professional skepticism.

Crosby consented to the entry of an order to settle the SEC charges on a no-admit, no-deny basis.  The order finds that Crosby violated the anti-fraud provisions of the federal securities law.  The order cites Crosby’s remedial acts and cooperation with the SEC in ordering it to cease and desist from future anti-fraud violations.  Lackey also agreed to settle the SEC’s charges and consented to the entry of an order that, without admitting or denying any of the findings, suspends her from appearing or practicing before the SEC as an accountant with the right to apply for reinstatement after three (3) years. Merka agreed to pay a $30,000 penalty and to not participate in future municipal securities offerings.  In an apparent attempt to highlight her primary role in the false reporting, the SEC effectuated the settlement with Merka through pleadings filed in the civil lawsuit, as opposed to the other parties who were allowed to settle via administrative orders.

This action highlights the SEC’s efforts and approach in enforcing securities laws in the context of municipal bond offerings.  In 2021, the Division of Examinations stated it would prioritize investments heavily used by retail investors or those that may present elevated risks, including municipal securities.  See https://www.sec.gov/news/press-release/2021-39.  Those involved in such offerings should consult experienced legal counsel in connection with preparing their offering materials, and particularly in any interaction with the SEC Division of Enforcement, in the event it commences an investigation or enforcement action.

Subscribe and Receive Alerts to New Articles

SUBSCRIBE
March 21, 2022
Written by: Michael MacPhail and Isaac Smith
Category: Municipal Bond Offerings

Post navigation

Previous Previous post: Cryptocurrency Exchange Founders Plead Guilty to Bank Secrecy Act Violations
Next Next post: The SEC Sues Investment Advisory Firm in Connection with Alleged Failure to Disclose Revenue Sharing and Other Financial Conflicts, as Well as Converting Clients to Wrap Accounts Without Considering Whether it is in Clients’ Best Interests

Subscribe to Email Alerts

Categories

  • Compliance and Supervision
  • Futures and Derivatives
  • Hedge Funds and Private Equity
  • Insider and Manipulative Trading
  • Investment Advisers and Broker Dealers
  • Municipal Bond Offerings
  • Public Companies, Accounting, and Auditing

©2023 Faegre Drinker Biddle & Reath LLP. All Rights Reserved. Lawyer Advertising.

  • About Us
  • Contact
  • Cookie Policy
We use cookies to improve your experience with our website. By browsing our site, you are agreeing to the use of cookies. For more information about how we use cookies, please review our privacy policy and cookie policy. OK
Privacy & Cookies Policy

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled
Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.
Non-necessary
Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.
SAVE & ACCEPT