The U.S. Securities and Exchange Commission, for the first time in Texas history, officially charged a Houston area public school district and two of its senior officials with fraudulently misleading investors in the school system’s $20 million bond issuance in 2018.
In court documents filed Wednesday, the SEC said the Crosby Independent School District failed to report $11.7 million in payroll and construction liabilities and falsely claimed to have $5.4 million in cash reserves in its audited 2017 financial reports.
Crosby ISD and its former chief financial officer, Carla Merka, knew the financial statements significantly underreported the payroll and construction liabilities and they “knowingly included false and misleading financial statements in the offering documents used to raise $20 million through the sale of municipal bonds in January 2018,” according to SEC documents.
The SEC also charged Crosby ISD’s former auditor, Shelby Lackey, with failure to perform critical audit procedures necessary to verify the accuracy of Crosby’s payroll and construction liabilities.
Lackey violated Generally Accepted Auditing Standards, known as GAAS, by failing to obtain sufficient appropriate audit evidence to support the audit opinion, by failing to properly supervise the audit and by failing to exercise professional judgment and maintain professional skepticism, according to documents filed in the U.S. District Court in the Southern District of Texas.
“The SEC is committed to holding bad actors in municipal securities offerings accountable for their misconduct and will continue to provide protections for investors,” stated SEC Fort Worth Regional Office Director David Peavler.
The SEC has brought several high-profile cases against municipalities and its agencies over the years, including charges against the city of Miami and the New York Port Authority. But Peavler said this is the first time such a muni-bond fraud case has been brought in Texas.
Seven months after Crosby ISD closed its bond issuance, the school district reported significant financial issues, including a negative general fund balance. As a result, ratings agencies downgraded Crosby ISD’s bonds in September 2018.
In documents filed Wednesday, the SEC reported that Crosby ISD officials consented to the SEC findings that it violated federal antifraud provisions. Merka agreed to pay $30,000 in penalties and agreed not to participate in future municipal securities offerings. Lackey also settled the charges by agreeing a suspension from appearing or practicing before the SEC as an accountant with the right to apply for reinstatement after three years.
None of the three were required to admit that they violated securities laws as part of the settlement agreement.
“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 G. Gaunt, chief of the Division of Enforcement’s Public Finance Abuse Unit.
The SEC enforcement team from the Fort Worth Regional Office included SEC Assistant Director Sarah Mallett, Assistant Director Jim Etri, Associate Director Eric Werner and trial attorney Matthew Gulde.
The Crosby Independent School District was represented by Dallas lawyers David Thompson and K. Adam Rothey of Thompson & Horton.
Auditor Lackey was represented by Erren Chen of Roberts Markel Weinberg Butler Hailey in Houston.
CFO Merka was advised by Houston lawyer Christopher L. Tritico of Tritico Rainey.