The former chief business officer of the Montebello Unified School District in Los Angeles County, California has agreed to admit wrongdoing and pay a $50,000 fine to settle Securities and Exchange Commission charges that he misled bond investors in a December 2016 $100 million bond offering.
Ruben James Rojas failed to disclose to bond investors that Montebello had fired its independent auditor after the auditor raised concerns about Rojas’s qualifications and integrity, among other things. Rojas approved the bond offering materials that were sent to investors “despite the fact that they misleadingly attached a clean prior-year audit opinion without disclosing that the auditor had been terminated after raising concerns,” the SEC said.
Rojas, who had previously disputed the findings, consented to the entry of Final Judgment, waived findings of fact and conclusions of law, waived any right to appeal, admitted the facts set forth and acknowledged that his conduct violated federal securities laws. He is enjoined from participating in municipal securities offerings and from violating Section 17(a)(3) of the Securities Act.
Superintendent Anthony Martinez as well as the district were also charged in the matter and agreed to settle an administrative proceeding, without admitting or denying the findings, and agreed to pay a $10,000 penalty when formal charges were brought against them in Sept. 2019. The district agreed to engage an independent consultant to evaluate its policies and procedures in regards to municipal securities disclosures.
Beginning in mid-November 2016, just a month before the bond offering in question, a senior Montebello accounting officer told Montebello’s independent auditor about allegations of fraud and accounting improprieties at the district. The firm had also been made aware that Rojas had been placed on administrative leave for the month of September 2017 following allegations of improper conduct.
The auditor sought more information concerning these allegations but Montebello and Rojas failed to provide timely answers, impeding the audit’s timely completion.
The audit firm warned Rojas, the Montebello Board and other school officials that they couldn’t complete the fiscal year 2016 audit without conducting further analyses of the fraud allegations and the district’s accounting controls.
Montebello and Rojas then terminated the audit firm, preventing the firm from completing the fiscal year 2016 audit.
The Dec. 7, 2016 bond offering made no mention of the audit firm’s termination and deceptively stated that the audit firm served only as an independent auditor to the district, attaching the 2015 audited financial statements with a clean audit opinion, the SEC said.
“The Preliminary Official Statement was materially misleading because it suggested that the fiscal year 2016 audit would be forthcoming in a timely fashion without disclosing that the Audit Firm requested a closed Board meeting to discuss concerns, including concerns about alleged improprieties at the District, that could delay the audit’s completion,” the SEC said in its complaint. “Rojas approved and authorized the dissemination of the POS to investors.”
A few days later on Dec. 13, 2016, Rojas signed on Montebello’s behalf, the contract of purchase with the underwriters, which required Montebello to disclose any information he was aware of that would render the information in the final official statement to be false or materially misleading.
Rojas was then working with the bond and disclosure counsel on a supplemental POS when counsel inquired about the state of the fiscal year 2016 audit and Rojas said that Montebello received an extension on the filing deadline for the audit report.
The district released a statement pledging its dedication to providing good disclosure.
“Our goal is to provide disclosures that are accurate and compliant with the law and values of this school district,” the statement said. “We are pleased that the SEC recognizes the district’s current efforts to do so. MUSD will continue to cooperate with local, state and federal agencies to ensure transparency to all of our stakeholders.”
The matter began to rear its head among California state auditors shortly after, when a 2017 audit report questioned the district’s ability to remain solvent and questioned its use of bond funds. The auditor found that the district did not have proper oversight of the bonds, putting them at risk of abuse and that it failed to ensure its employees did not have conflicts of interest when approved expenditures and contracts related to bond funds.
The auditor warned that the district was in danger of becoming financially insolvent and said the board continued to approve budgets in which expenditures exceeded revenues.
In July 2019, it was announced by local newspapers that the school district’s former superintendent Susanna Contreras Smith would be paid $4.9 million for a wrongful termination lawsuit after alleging she was fired in 2016 for exposing political corruption at the district and for coming forward about alleged misconduct involving Rojas.