SEC charges could prove a credit negative for Oyster Bay, N.Y.

Securities and Exchange Commission charges levied against the Town of Oyster Bay could be credit negative for New York State’s fourth largest township, according to Moody’s Investors Service.

Oyster Bay is rated Baa3, the lowest investment grade rating.

The SEC charged Oyster Bay and former town supervisor John Venditto in November with securities fraud alleging that the Long Island municipality misled municipal bond investors by failing to disclose indirect guarantees on loans to a private business operator. Investigators are seeking to impose several penalties against Oyster Bay including banning the township from issuing debt without court approval for five years unless it implements recommendations of court-appointed consultant.

“Given the town’s high dependence on cash-flow borrowing, the potentially significant penalties limiting debt issuance and imposing a fine would be credit negative,” Moody’s analyst Douglas Goldmacher said in a report Thursday. “The town has a very narrow cash position.”

Goldmacher noted that the near-term impact of the legal action will be “limited” because the suit will take “considerable time” to play out in court. The SEC suit alleges that between June 2010 and June 2012 Oyster Bay agreed to indirectly guarantee more than $20 million from four private loans to restaurateur Harendra Singh. The town failed to disclose the loan guarantees for any of its 26 securities offerings that occurred from August 2010 through December 2015, according to the SEC. The town intends to contest the charges and is separately pursuing litigation related to the allegations, which could affect the SEC lawsuit, according to Goldmacher.

Goldmacher noted that Oyster Bay’s cash position has declined since 2010 while its annual issuance of tax anticipation notes and revenues anticipation notes has risen. He stressed however that the town’s borrowing limitations full impact won’t fully be realized until the details of a “hypothetical” consultant recommendations are known. He said an outside consultant appointment could prove positive for the town if internal controls are improved.

Moody’s withdrew its Oyster Bay rating in early 2016 due to a lack of financial information before reinstating it in January 2017 at Baa3. Joseph Saladino, a former Republican state assemblyman, was appointed to the town supervisor post in February and won a full term on Nov. 7 when he defeated Democrat Marc Hermann. Venditto resigned as supervisor this past January two and a half months after he was indicted on separate federal corruption charges.

“While the prior administration continues to come under criticism, town finances are now headed in the right direction thanks to fiscally and ethically-sound policies implemented by my administration,” said Saladino in a statement responding to the Moody’s report.