The giant Westlands Water District will pay $125,000 to settle Securities and Exchange Commission civil charges that it misled investors about its financial health, officials said Wednesday.
The nation’s largest water district, and one of its most politically active, Westlands will pay to settle charges that arose out of a 2012 bond measure. The district’s general manager, Thomas W. Birmingham, also will pay $50,000 as part of the settlement.
The charges, which Westlands and Birmingham neither admitted nor denied, involved accounting maneuvers that allegedly masked revenue reductions caused by drought and corresponding cuts in water delivery.
“The undisclosed accounting transactions, which a manager referred to as a ‘little Enron accounting,’ benefited customers but left investors in the dark about Westlands Water District’s true financial condition,” Andrew J. Ceresney, director of the SEC’s Enforcement Division, said in a statement.
Issuers must be truthful with investors, and we will seek to deter such misconduct through sanctions, including penalties against municipal issuers in appropriate circumstances.
SEC Enforcement Division Director Andrew J. Ceresney
According to the SEC, Birmingham “jokingly” made the Enron reference in discussions with Westlands’ nine-member board of directors. The now-defunct Enron was a Texas energy company that grew fast and then collapsed following revelations of crooked bookkeeping.
Louie David Ciapponi, the water district’s former treasurer and assistant general manager, agreed to pay a $20,000 penalty to settle charges as well. Ciapponi also neither admitted nor denied the charges.
The record $125,000 to be paid by Westlands marks only the second time a municipal bond issuer will pay a financial penalty to settle an SEC enforcement action.
“Westlands, Birmingham and Ciapponi determined that entering into the settlement to fully resolve the matter was in the district’s best interest,” Westlands said in a statement.
Westlands officials declined to speak about the case, but they noted in the statement that “the settlement did not find that Westlands, Birmingham and Ciapponi intended to mislead potential purchasers of the 2012 bonds.”
The Westlands statement also stressed that the district has taken “prompt remedial actions,” including drafting new written policies and training.
Even so, one longtime Westlands critic said she wasn’t surprised by the SEC investigation, adding that it suggests doubts about the district’s true financial picture.
“The legal action taken by the SEC today against Westlands raises serious questions about the wisdom of relying on this large federal contractor to finance about half of Gov. Brown’s delta water-export tunnels,” said Patricia Schifferle, director of Pacific Advocates.
Westlands, in its statement, noted that the district “has not missed any payment required to repay the 2012 bonds” or others issued by the district.
According to the SEC, Westlands had agreed in prior bond offerings to maintain a 1.25 debt service coverage ratio, which is a measure of the ability to make future bond payments. It is the ratio of revenue to debt service payments.
In 2010, though, the SEC said, Westlands officials learned that drought conditions and the resulting revenue losses would prevent it from reaching the 1.25 ratio. Rather than raise water rates for farmers in the 600,000-acre district, the SEC said, Westlands used “extraordinary accounting transactions” that reclassified reserve funds as revenue.
The district then informed potential investors in the $77 million bond issuance in 2012 that it had met or exceeded the 1.25 ratio for each of the five previous years.
“That wouldn’t have been possible without the extraordinary 2010 accounting transactions,” the SEC said.