On March 16, the SEC filed a municipal bond fraud case against Crosby Independent School District and its former CFO in a $20 million bond offering.[1] Crosby is a suburb of Houston, Texas. The SEC also charged the district’s outside auditor with improper professional conduct and suspended her from appearing or practicing before the Commission with a right to reapply after three years.
A review of the allegations reveals that the case involved classic financial reporting fraud. The SEC alleged that Crosby ISD’s year-end 2017 financial statements seriously understated its payroll and construction liabilities by failing to report some $11.7 million of such liabilities. Those same audited financial statements also contained false claims that the district had $5.4 million in general fund reserves, thereby substantially overstating its assets. According to the Commission, the district and the then-CFO knew that the financial statements were false but issued them anyway. The CFO also allegedly signed false management representation letters. The false statements also appeared in the offering documents for the municipal bond sale.
The fraud allegedly came to light in June 2018 when the successor CFO discovered the misstatements. In August 2018, seven months after the offering, the district disclosed significant financial distress, including that it had a negative general fund balance. The following month, ratings agencies downgraded the district’s bonds.
The audit partner agreed...
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