Rochester MAs denied motion to dismiss in SEC case

Capital Markets Advisors and its two principals Richard Ganci and Richard Tortora, municipal advisors to the City of Rochester, New York have been denied their motion for dismissal in the ongoing Securities and Exchange Commission lawsuit against them.

The charges were leveled as part of a group of actions against the City of Rochester, its former finance director Rosiland Brooks-Harris and former Rochester City School District CFO Everton Sewell in 2022 for misleading investors in a $119 million bond offering. CMA, Ganci and Tortora are accused of misleading investors, breaching their fiduciary duty and failing to disclose conflicts to municipal clients.

CMA argued in its motion that the SEC has failed to plausibly allege scienter or knowledge of wrongdoing, or negligence, and that the SEC failed to adequately plead scheme liability. Western District of New York Judge Elizabeth Wolford was unpersuaded by all of the claims.

But the motion was somewhat of a long shot to begin with, as the court at this stage is required assume everything in the SEC’s complaint to be true. Pre-trial discovery will come next, where testimony will be taken from witnesses and then both parties will be given the chance to file for summary judgment, which will consider all of the evidence in the case.

“We are confident that the evidence will show that there is zero evidence to support the SEC’s claims against CMA,” said Robert Knuts, partner at Sher Tremonte and lawyers for CMA, Ganci and Tortora.

In its initial complaint, the Commission argued that the defendants “misled investors with bond offering documents that included outdated financial statements for the Rochester City School District and did not indicate that the district was experiencing financial distress due to overspending on teacher salaries.”

CMA argued that the complaint fails to sufficiently plead scienter or knowledge of wrongdoing because it is undisputed that neither of the defendants with the City or the CMA defendants were aware that Sewell was lying about the District’s budget and fund balance as chief financial officer. 

“Because the true secret was that the district illegally exceeded its budget for fiscal 2019—which the SEC does not allege defendants were aware of—defendants contend that the failure to disclose both reasons for the $63 million cash decline does not matter,” the 24 page ruling said.

CMA also argued that as a matter of law, it is not reckless for one entity to rely on the financial representation of another without further investigation.

“Reasonable minds may differ as to whether investors would care that there were two reasons for the $63 million cash decline–one being a timing issue regarding state aid and the other being a more structural issue regarding teacher salaries. But that question is not susceptible to decision on the pleadings,” the filing said.