In early June, the town of Oyster Bay New York settled 2017 charges issued by the Securities and Exchange Commission (SEC) that it committed fraud related to Municipal Bond Securities it sold investors while failing to disclose the nature and potential impact of side deals with a local food services owner and operator.
Fraud and The Failure to Disclose
The business owner in question, who owned and operated a number of restaurants and concession stands at public facilities, was indirectly guaranteed as many as four loans exceeding $20 million—allegedly the result of questionable relationships with the town supervisor John Venditto and other public officials, involving:
- Political support
Such loans, which required disclosure to investors, may have directly affected 26 of the town’s securities offered between August 2010 and December 2015.
According to the SEC press release, information regarding the loan guarantees “was material to current and prospective investors due to the potential impact on Oyster Bay’s finances.”
In a further statement, Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, made the following comment:
“As alleged in our complaint, Oyster Bay and its most senior elected official concealed from its municipal investors that the town had gone to great lengths and taken on financial risk in an unusual decision to assist a vendor. Investors were deprived of information they needed to understand the town’s true financial condition as they made investment decisions.”
The Oyster Bay Settlement
Oyster Bay has settled the 2017 charges by:
- Agreeing to permanent injunctions against violating the antifraud provisions of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933
- Agreeing to employ an independent consultant to advise the town on its policies, procedures, and internal controls regarding its disclosures for securities offerings
The outcome is still subject to district court approval.
The Importance of Thorough and Proper Disclosure
While Oyster Bay officials allegedly committed a number of seemingly intentional acts of fraud by failing to disclose their activities, similar trouble arises far too often for firms who commit unintentional acts tantamount to fraud.
Such inadvertent wrongdoing is often the direct result of:
- Ineffective disclosure practices
- A lack of internal oversight mechanisms that monitor the activities of, and provide accountability for, those individuals engaging in high-level financial decisions and the issuing of securities
While Oyster Bay is a municipality, as opposed to a publicly traded company, the lessons contained within this case easily cross over that divide: Constructing and implementing robust policies and procedures represent your firm’s best line of defence against enforcement action.
Developing Disclosures and Accountability Measures—We Can Help
The attorneys at Core Compliance Legal Services are available to help with the creation and revision of effective disclosures, the implementation of internal monitoring protocols, and investigative procedures that help your firm remain in compliance and avoid legal difficulties related to inadvertent fraud.