Bonds

Capital Markets Advisors and Richard Ganci , formerly municipal advisors to Rochester, New York, have requested partial judgment against Securities and Exchange Commission claims that they misled investors, ignored signs of financial distress and failed to disclose material conflicts of interest to nearly 200 municipal clients.

That’s the latest in the lawsuit against the City of Rochester, its former finance director Rosiland Brooks-Harris, former Rochester City School District chief financial officer Everton Sewell, who has already settled, and Capital Markets Advisors as well as its two co-principals Richard Ganci and Richard Tortora.

CMA and Ganci argue that the Commission “relies on a combination of conclusory allegations, plainly erroneous factual statements, allegations not included in the complaint, and wishful thinking regarding applicable Second Circuit law. But worst of all, the SEC argues that its fraud claims against CMA and Ganci can be based on an allegation of ‘knowledge’ that is directly contradicted by the SEC in its related case against Everton Sewell,” CMA and Ganci wrote in their motion.

Sewell agreed to settle SEC charges by consenting, without admitting or denying the findings, to a court order prohibiting him from future antifraud violations and from participating in future municipal securities offerings. He was ordered to pay a $25,000 penalty.

“It is fair to infer that the reason the SEC filed a separate action against Sewell was to provide the SEC with the opportunity to avoid making contradictory ‘knowledge’ allegations in the same complaint,” CMA and Ganci wrote. “This Court should not allow an agency of the United States Government to get away with such raw, prejudicial gamesmanship.”

They also call on the court to dismiss all claims against them concerning sales of securities by the City of Rochester.

If the court accepts the arguments in the motion, it may well signal the end of the case against them. If not, things will continue to move toward trial unless a settlement is reached prior.

The SEC has argued that Ganci knew the purpose of the bond offering in question was to address the School District’s overspending and that Ganci and CMA bore responsibility for addressing questions raised by the ratings analyst, as well as the fact that Ganci knew the school district misled the ratings analyst.

“The SEC’s opposition papers do not even attempt to address, let alone rationalize, the contradictions between the SEC’s allegations in SEC v. Sewell and the SEC’s allegations regarding Ganci’s alleged ‘knowledge’ that Sewell had made misrepresentations to the ratings analyst or that the School District’s 2019 cash flow statement was inaccurate.”

They further argue that considering the fact that the Commission obtained a final judgment against Sewell, the Court should find “that the SEC is judicially estopped from alleging in this action that Ganci (or Brooks-Harris) had actual knowledge that Sewell misrepresented the facts to the ratings analyst or that the School District’s financial statements were inaccurate because the SEC alleged in SEC v. Sewell that no one outside the School District finance department knew those facts prior to the sale of the Revenue Anticipation Notes,” CMA and Ganci wrote.

CMA and Ganci also note that the Commission does not attempt to identify any motive for acting negligently or that they received any special benefit from the arrangement.

“The sad truth is that if the School District personnel had disclosed the actual spending that had occurred during 2018-2019 prior to the sale of the RAN, nothing material would have changed concerning the RAN,” CMA and Ganci wrote. “For these reasons, the Court should grant the motion of the defendants CMA and Ganci for partial judgments on the pleadings.”

The case is set to next convene via telephone conference on Oct. 17.

Lawyers for the defendants did not immediately respond to requests for comment.

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