Securities and Exchange Commission agrees to settlement with Oyster Bay Municipality which Avoids Fines on case alleging financial fraud

town financial fraudThe New York town of Oyster Bay has been granted a settlement by the Securities and Exchange Commission (SEC) that will allow for no fines relating to a 2017 SEC lawsuit involving alleged financial fraud. This agreement is contingent on the assurance that the town hire a municipal finance consultant to review bond disclosures for three years.

The town of Oyster Bay as well as their former town supervisor John Venditto, who was not involved in the settlement, have been accused of defrauding investors by keeping vital information from them, including side deals with local restaurants to indirectly guarantee private loans. Those investigating the case have stated that during the time of the 2017 suit Oyster Bay was not disclosing loan guarantees that totaled $20 million during 26 securities offerings in the years 2010 to 2015

Allegations such as these could have resulted in much harsher punishments for the town, as they have in the past with other fraud cases. However, Oyster Bay received a light settlement that allowed them to avoid fines and seek professional financial assistance for up to three years. Initially, though the SEC sought to impose a court-appointed consultant for a five-year period with the power to prevent borrowing, but this was changed throughout the settlement.

With this currently agreed upon settlement, Oyster Bay will not only be free from fines but will also have the right to deny or admit the allegations of past fraud or negligence. Additionally, the municipal financial consultant during the three years will have limitations under the settlement that allow for them to review the town’s disclosure practices while producing and recommending improvements that will benefit the town if they see the need or opportunity.

Many find this settlement to be a fortunate agreement for this New York town and the some 290,000 who reside there.

Douglas Goldmacher, an analyst for Moody’s Investors Service, has publicly stated that they believe “The terms of the proposed settlement appear to be favorable for the Town of Oyster Bay,” they continued to explain their reasoning that “While a fine would have been credit negative in proportion to its size, of greater import is the fact that the town will not have its ability to issue debt curtailed, as had been previously proposed by the SEC. Given the town’s high dependence on accessing the short-term debt market, this is a credit positive.”

Joseph Nocella, Town Attorney for Oyster Bay, has also stated in a memo that, “The settlement is in the best interests of the town particularly because there is no fine or monetary penalty within the settlement,” also including that “It is likely that the efforts of the outside consultant will give even greater confidence to the securities markets about the soundness of the Town’s municipal bonds.”

Howard Cure, director of municipal bond credit research at Evercore Wealth Management, has also made comments that the SEC penalties under this settlement are very light when one considers what could have happened to Oyster Bay in this situation. Cure also seems to see a lot of wealth and opportunity in this town’s future if the agreement stands. “You have to convince investors that they have cleaned up their act and have monitors in place,” commented Cure. “Once the town is regulated, and you have some controls in place it should increase confidence.”

Matt Fabian, Municipal Markets Analytics partner, chimes in as well suggesting that this lawsuit being in the past may have been a positive in that ,“It does lift a cloud,” ,allowing for stronger disclosure practices that could eventually help their relationship with investors in the long run.

The future of the town is already starting to shine brighter as S&P Global Ratings restored the town’s rating to investment grade in March 2018 with an upgrade to BBB- from BB+. This was due largely to improved reserve levels.

Since the SEC change was put into place, Oyster Bay has once tested the market with a $191.2 million competitive transaction that was sold in two separate sales in May of 2018. One was a competitive sale of public improvement bonds totaling $152.7 million was won by Bank of America Merrill Lynch with a net interest cost of 3.32%, and the other was a $38.54 million of bond anticipation notes also won by BAML but with a NIC of 2.28%. This was rated Baa3 by Moody which is defined as the lowest rating of investment grade with subject to moderate credit risk.

Those who are interested in learning more about this case and others like it can find more information at Jeffrey Newman Law!