Sweetwater and Former Financial Officer Take Deal in SEC Fraud Case | Voice of San Diego

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Sweetwater and Former Financial Officer Take Deal in SEC Fraud Case

Calling the settlement a positive step, the district ‘consented’ to a SEC finding that its employees had violated two sections of the Securities Act. The former chief financial officer also agreed to repay a $28,000 fine and never participate in future security offerings.

A Sweetwater Union High School District meeting in February 2020. / Photo by Adriana Heldiz

After a years-long investigation into potential fraud, the Securities and Exchange Commission has announced a settlement in its case against Sweetwater Union High School District.

SEC investigators charged the district’s former chief financial officer Karen Michel with lying to investors about the state of Sweetwater’s finances. As part of the settlement, Michel did not admit to wrongdoing or deny the charges but agreed to pay a $28,000 fine and never participate in future security offerings.

The district itself also settled with the SEC. Without admitting or denying guilt, the district “consented” to an SEC order, which found that Sweetwater violated two sections of the Securities Act, according to an SEC press release.

Sweetwater’s finances first came under scrutiny in September 2018, when Voice of San Diego reported the district had suddenly discovered a $30 million budget hole. It turned out the budget hole was neither sudden nor recently discovered. High-level administrators knew the district was engaged in deficit spending and manipulated financial entries to make the budget look better than it was.

The primary cause of the budget hole was a 3.75 across-the-board raise in 2017, VOSD reported weeks after the overspending was discovered.

SEC investigators came to a nearly identical conclusion: “The misleading budget projections were primarily the result of Sweetwater failing to accurately budget for a 3.75 percent pay raise approved shortly before the beginning of the 2018 fiscal year,” an SEC order reads.

Michel’s number two in the finance department, Doug Martens, told her the proposed raise would devastate the district’s budget, emails obtained by VOSD later showed. But rather than show the true impact of the raises, Michel signed off on documents that hid their real cost.

“That, my friends and colleagues, is a cover up,” said a state investigator back in December 2018.

Michel presided over a budget that “failed to accurately account for the 3.75 percent salary increase, and instead anticipated a less than 1 percent increase in employee salaries,” the SEC order reads.

Michel could not be reached for comment.

Normally, SEC investigators wouldn’t be interested in a local school district fudging its budget. But during the time Sweetwater was misstating its finances, it sold $28 million in bonds to investors. As a matter of course in those bond sales, Sweetwater had to provide statements and documents verifying the state of its finances to its investors.

Manipulating financial information that is reported during bond sales is a violation of the Securities Act, as VOSD reported back in November 2018, before the SEC’s investigation started.

Regulators would want to know, “Is it a mistake or was it intentional?” Matt Fabian, a bond markets researcher at Municipal Market Analytics, told VOSD at the time. “Even if it is a relatively small misrepresentation of information, regulators take that very seriously.”

SEC investigators ultimately found Michel misled investors as well as a credit rating agency.

“Michel included misleading budget projections which indicated that the district could cover its costs, when in reality the district’s finances were severely strained. Although Michel was aware of information showing that the projections were untenable, she omitted this fact,” read charges filed by the SEC in U.S. District Court.

A Sweetwater spokeswoman emailed the following response: “This settlement resolves all outstanding SEC claims against the district and represents another positive step in the district’s ongoing remedial efforts to continuously evaluate and improve its fiscal health. As required by the SEC’s order, the district neither admits nor denies the findings or charges in the order.”

SEC officials did not respond to questions about whether there could be more charges to come in the Sweetwater case. Former superintendent Karen Janney was fired last September following a state audit that also confirmed some of the SEC’s findings.

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