SEC Fines Firm for 'Fraudulent' Audits of Ramapo, Ballpark

The audit firm that told everyone Ramapo's municipal bond offerings were a safe investement will pay almost $500,000 in fines and penalties, and one of its senior partners is suspended from public accounting, the Securities and Exchange Commission has announced.

The SEC announced fraud charges back in April against Ramapo, its local development corporation, and four town officials, alleging that they cooked the books to hide a deteriorating financial situation from their municipal bond investors.

Now it has cracked down on Harrison-based firm PKF O’Connor Davies and Domenick F. Consolo. SEC officials say they deceived investors in the town's municipal bonds, telling them everything was fine when in fact town officials were scurrying to hide a deteriorating financial situation.

“When audit reports are used to sell municipal bonds, investors expect those reports to be accurate,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “Consolo failed to exercise professional skepticism and PKF O’Connor Davies issued false unmodified audit reports, and they left investors without an accurate picture of the town’s finances and its ability to repay bondholders.”

SEC alleged that Ramapo officials resorted to fraud to hide the strain in the town’s finances caused by the approximately $60 million cost to build its baseball stadium as well as the town’s declining sales and property tax revenues — not once, but many times. According to the SEC, inflated general fund balances were used in offering materials for 16 municipal bond offerings by Ramapo or the Ramapo Local Development Corp. to investors,

Town officials falsely depicted positive balances between $1.4 million and $4.2 million during a six-year period when the town had actually accumulated balance deficits as high as nearly $14 million, the SEC alleges. And because the stadium bonds issued by the RLDC were guaranteed by the town, officials also masked an operating revenue shortfall at the RLDC and investors were unaware the town would likely need to subsidize those bond payments and further deplete its general fund.

The SEC alleges that Ramapo Town Supervisor Christopher P. St. Lawrence, who also served as RLDC’s president, masterminded the scheme to artificially inflate the balance of the general fund in financial statements for fiscal years 2009 to 2014.

ALSO SEE:

• Prosecutors: Town Officials Sold $150M in Bonds Based on Lies
• Reaction to Ramapo Indictments: Calls for Review, Reform, Resignation
• SEC Charges 4 in Ramapo; Seeks Financial Penalties, Court Orders

Here's Monday's entire statement from the SEC:

The Securities and Exchange Commission today announced that a New York-based audit firm and a senior partner agreed to settle charges that they issued fraudulent audit reports in connection with municipal bond offerings by the town of Ramapo, N.Y., and its local development corporation.

The SEC’s order finds that PKF O’Connor Davies and Domenick F. Consolo allowed Ramapo to record a $3.08 million receivable in its general fund for a property sale that Consolo knew had not occurred. Consolo also ignored red flags and relied upon what turned out to be false representations by Ramapo officials about certain other receivables, interfund transfers, and liabilities. PKF O’Connor Davies failed to take appropriate steps to mitigate the risk of material misstatements even after senior management became aware that Ramapo’s financial statements were the subject of multiple law enforcement investigations and Consolo received complaints about possible fraud.

Ramapo, its local development corporation, and four town officials were charged with fraud earlier this year and accused of hiding a deteriorating financial situation from municipal bond investors.

“When audit reports are used to sell municipal bonds, investors expect those reports to be accurate,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “Consolo failed to exercise professional skepticism and PKF O’Connor Davies issued false unmodified audit reports, and they left investors without an accurate picture of the town’s finances and its ability to repay bondholders.”

Consolo and PKF O’Connor Davies consented to the SEC’s order without admitting or denying the findings. The firm agreed to forfeit approximately $380,000 in audit fees and interest and pay a $100,000 penalty. O’Connor Davies also must engage an independent consultant. Consolo agreed to pay a $75,000 penalty and be suspended from practicing public company accounting. He’s also prohibited from acting as the engagement partner or engagement quality control reviewer on any municipal audit for five years.

The SEC’s order finds that Consolo violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Section 17(a) of the Securities Act of 1933, and PKF O’Connor Davies violated Sections 17(a)(2) and 17(a)(3) of the Securities Act.

The SEC’s continuing investigation is being conducted by Daniel M. Loss, Pamela Sawhney, and Celeste A. Chase of the New York office and Creighton L. Papier of the Public Finance Abuse Unit. Assisting the investigation are Alexander Vasilescu of the New York office and Jonathan Wilcox, Joseph Chimienti, Louis Randazzo and Mark R. Zehner from the Public Finance Abuse Unit. The case is being supervised by Sanjay Wadhwa of the New York office and LeeAnn Ghazil Gaunt of the Public Finance Abuse Unit. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.