WASHINGTON – An audit firm and one of its senior partners have agreed to pay a combined $555,000 to settle Securities and Exchange Commission charges that they issued fraudulent audit reports in connection with municipal bonds offered by the town of Ramapo, N.Y.
The partner was suspended from appearing before the SEC as an accountant.
The firm, Harrison, N.Y.-based PKF O'Connor Davies, agreed to forfeit approximately $380,000 in audit fees and interest as well as pay a $100,000 penalty. It also agreed to engage an independent consultant, review its quality controls, and institute training as part of the settlement.
Domenick Consolo, the senior partner, agreed to a $75,000 fine and a suspension from practicing public company accounting. He also was hit with a five-year ban on serving as the engagement partner or engagement quality control reviewer in connection with any municipal audit engagement.
"When audit reports are used to sell municipal bonds, investors expect those reports to be accurate," said Andrew Calamari, director of the SEC's New York regional office. "Consolo failed to exercise professional skepticism and PKF O'Connor Davies issued false unmodified audit reports, and they left investors without an accurate picture of the town's finances and its ability to repay bondholders."
The firm and senior partner agreed to the settlements without admitting or denying the SEC's charges.
O'Connor Davies said in a statement that it stands by the integrity of its work with Ramapo.
"We feel strongly that a continued back and forth with regulators would only expend valuable firm resources and divert focus from our ongoing business and growth goals," the firm said. "We're confident what we learned through this process will provide valuable insights that will benefit our municipal clients moving forward."
The lawyer who represented Consolo could not be reached for comment.
The settlements follow prior SEC fraud charges against Ramapo, its local development corporation, and four town officials tied to allegations that the entities hid the town's deteriorating financial situation from investors. The litigation over those charges is still ongoing. Two of the individuals, Christopher St. Lawrence, supervisor and director of finance for Ramapo, and Aaron Troodler, the former executive director of the Ramapo Local Development Corp. (RLDC), are also facing criminal charges.
The SEC found that between September 2010 and September 2015, Ramapo conducted 14 municipal securities offerings and the RLDC conducted two, both of which were guaranteed by the town. The official statements for those offerings made use of the town's audit reports for fiscal years 2009 through 2012 as well as for fiscal year 2014.
Consolo was the audit partner responsible for the audits during that period and the SEC said that both Consolo and the firm knew or should have known that the audit reports were or would be incorporated in muni offering documents by the town and RLDC.
A number of the examples of fraud the SEC cites in the settlement agreement stem from statements made about Ramapo's general fund, which served as the town's primary operating fund. Starting in its financial statements for fiscal year 2009, the town recorded a $3.08 million receivable for the town's sale of a 13.7-acre parcel of land called the Hamlets property. The receivable represented about 75% of the town's reported general fund balance that year, according to the SEC.
The commission found that while Consolo was auditing the statements in April 2010, he discovered that the sale was not expected to take place until later in the town's fiscal year 2010. Consolo acknowledged to a colleague that "This is going to be a real problem … It's not even close to a sale by December 31, 2009," according to the settlement.
Despite the discovery, Consolo allowed the town to record the receivable in the 2009 financials.
The SEC cited the audit co-manager as saying in an email to a colleague about the decision at the time that "No one wants to give the ok for this, but Dom [Consolo] said go ahead and book it."
Consolo then learned while auditing the town's financial statements the following year that the Hamlets property had still not been sold and likely wouldn't be because the parcel was found to be a home for timber rattlesnakes, a threatened species. Despite that information, Consolo allowed the town's financial statements for fiscal years 2010 through 2014 to reflect the sale of the property as a general fund receivable. In each of those fiscal years, the receivable was the difference between the general fund balance being positive or negative, the SEC said.
Also during the 2010 audit, Consolo was falsely told that the town was going to be getting an identical $3.08 million from the RLDC under a reimbursement agreement. Consolo relied on those false representations even though there were several red flags of which he should have been aware, according to the SEC.
In addition to the false receivable, the SEC found that Consolo did not sufficiently investigate a $314,000 receivable in 2010 tied to a contemplated but unconsummated sale of property and a $734,000 receivable in 2012 from federal reimbursement aid relating to Hurricane Sandy. He also ignored concerns from Ramapo's finance department that inter-fund transfers from the town's Ambulance Fund to the general fund between fiscal years 2009 and 2014 were improper. The cumulative impact of the transfers amounted to more than $12 million for the general fund, the commission said.
Other issues the SEC uncovered included a $700,000 RLDC liability for legal counsel fees that went unreported in 2010 and a town expenditure of $767,224 for an engineer that went unreported between at least 2011 and 2014. There were also several occasions where Consolo failed to adequately investigate fraud concerns tied to the town's accounting between fiscal years 2010 and 2013, according to the SEC.
The SEC's charges against O'Connor Davies stem from the firm's senior management failing to take sufficient steps to lessen the risk of material misstatements in its audit reports after finding out about federal investigators' interest in Ramapo's finances. The firm's five-member executive committee learned about a Federal Bureau of Investigation search warrant at Ramapo Town Hall in May 2013 and in the same month was asked to give the SEC information about its Ramapo audits.
O'Connor Davies continued to allow the recognition of the faulty receivable and did not implement enhanced quality control procedures for its Ramapo business even after learning of the investigations, according to the SEC.
The SEC found that Consolo violated Section 17(a)(1) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, which prohibit negligent and reckless or willful fraud. Both Consolo and O'Connor Davies violated Sections 17(a)(2) and 17(a)(3) of the Securities Act which prohibits getting money from securities transactions involving misstatements or omissions of material fact.
The SEC also used Section 4C of the Exchange Act and one of the commission's rules of practice to find that Consolo and O'Connor Davies engaged in improper professional conduct.
