(CN) - The city of Miami, Fla., must face claims that the bonds it has issued violated the anti-fraud provisions of the U.S. securities law, a federal judge ruled.
A July 2013 complaint against Miami takes issue with three bonds it issued in 2009.
The Securities and Exchange Commission claims that Miami carried out a scheme with budget director Michael Boudreaux as its architect.
In fiscal years 2007 to 2010, the city reported that overspending, revenue underperformance and declining property taxes was causing the budget balances of its general fund to decrease.
Miami allegedly issued $51 million in uninsured Limited Ad Valorem Tax Bonds on May 29, 2009. Two months later, the city issued $37 million in uninsured Non Ad Valorem Revenue Refunding Taxable Pension Bonds. And at the end of that year, it issued $65 million in uninsured Special Obligation Bonds secured by pledges of certain local gas and transportation taxes and parking surcharges, according to the complaint.
Boudreaux's Comprehensive Annual Financial Report ultimately contained misleading disclosures upon which the investing public relied, the SEC said.
Among its inaccuracies, the report allegedly said that money allocated for projects was unused. The report also allegedly omitted funds that would increase the balance.
The SEC said Boudreaux was warned about making unauthorized transfers from the general fund to the capital fund, offering a temporary solution to offset the decreased balance.
Between 2007 and 2009, the city used the means or instruments of transportation or communication in interstate commerce, according to the complaint.
Using the mail, the city also offered and sold securities with the intent to defraud, according to the complaint.
The claims against Boudreaux say materially false and misleading information he furnished was incorporated into the city's filings. Boudreaux also allegedly devised all transfers and budget information.
In a motion to dismiss, Miami said the SEC had failed to plead any false or misleading statement.
U.S. District Judge Cecilia Altonaga disagreed on Dec. 27.
"As to the city's first line of attack concerning the lack of allegations concerning false statements, the court finds the complaint satisfies the who, what, when, where, and why of Rule 9(b)," Altonaga wrote, referring to the Federal Rules of Civil Procedure.
Miami also could not show that the SEC failed to plead materiality as to any of the challenged statements, according to the 28-page ruling.
"The SEC insists it has met its 'light burden' of alleging materiality," Altonaga wrote. "The undersigned agrees materiality is satisfied. There is just enough in the complaint to prevent the court from finding the information "so unimportant that reasonable minds could not differ" as to its materiality."