WASHINGTON – The Securities and Exchange Commission on Wednesday charged California's largest agricultural water district and two officials with misleading investors about its financial condition when it issued $77 million of bonds in 2012.
Fresno, Calif.-based Westlands Water District, Thomas Birmingham, its current general manager, and Louie David Ciapponi, its former assistant general manager, have agreed to pay $125,000, $50,000, and $20,000, respectively, to settle the charges without admitting or denying the findings. All of them agreed to cease and desist from such violations and Westlands agreed to develop written financial disclosure policies and to train staff.
In a statement released Wednesday, Westlands noted: "The Commission did not allege and the order approving the settlement did not find that Westlands, Birmingham, or Ciapponi intended to mislead potential purchasers of the 2012 bonds." It added that it, "has not missed any payment required to repay the 2012 bonds and other bonds issued." Westlands also said the settlement took into account its cooperation during the SEC's investigation.
According to the SEC, Westlands' bond documents contained a rate covenant guaranteeing the district would maintain net revenues equal to 125% of the debt service it had to pay in each fiscal year. The covenant was meant to assure investors and others that Westlands had sufficient ability to meet its debt service obligations on the bonds.
However, Ciapponi learned in October 2009 that, because of drought conditions, Westlands would receive a reduced amount of water from the U.S. Bureau of Reclamation, the entity from which it purchases the majority of its water. The reduction caused the district's projected revenue for fiscal year 2010 to be approximately $10 million short of what was required to maintain its debt service coverage ratio. In order to maintain the ratio the district would have had to raise its water rates and land charges by about 11.6%, something customers would not be happy about and the district wanted to avoid. So instead it decided to account for the deficit with what Birmingham later jokingly called "a little Enron accounting."
In a meeting in November 2009, Westlands officials talked to the district's accountant about reclassifying cash reserves or retained earnings as revenue instead of raising rates. The Westlands staff, through Birmingham and Ciapponi, convinced the district's Finance and Administration Committee to recommend to the district's board that Westlands reclassify some of its current funds. The board subsequently approved that recommendation and ultimately reclassified $9.8 million in various reserves as additional revenue to be recorded in 2010, according to the SEC. Without the reclassifications, the commission found that the district's debt service coverage ratio would have been 0.63 for that fiscal year.
Two years later, the district made other, unrelated changes that reclassified several 2010 and 2011 payments it had made to the U.S. Bureau of Reclamation as expenses. Westlands recorded the prior period adjustment for fiscal year 2010 expenses but, in accordance with generally accepted accounting principles, did not restate net revenue for 2010, which would have been lower than was reported and caused the debt service ratio to drop.
The district then sold $77 million of revenue refunding bonds that year, saying it had met or exceeded the 1.25 ratio for each of the past five years. It did not disclose the accounting changes it made in 2010. If Westlands had disclosed the effect of both the 2010 reclassifications and the 2012 prior period adjustment, it would have shown that the actual 2010 debt service ratio was only 0.11, the SEC said.
"The undisclosed accounting transactions … benefited customers but left investors in the dark about Westlands Water District's true financial condition," said Andrew Ceresney, director of the SEC enforcement division. "Issuers must be truthful with investors and we will seek to deter such misconduct through sanctions, including penalties against municipal issuers in appropriate circumstances."
The SEC found that the actions of the district, Birmingham, and Ciapponi violated Section 17(a)(2) of the Securities Act of 1933, which prohibits false or misleading statements when offering or selling securities.
