File photo: Denise Civiletti

Riverhead Town’s financial advisory firm has been named as a defendant in a federal fraud suit brought by the Securities and Exchange Commission last week alleging they knowingly misled investors in a $119 million municipal bond sale for the City of Rochester in 2019.

Capital Markets Advisors, a Great Neck-based municipal advisor and consulting firm hired by the Town of Riverhead in February 2016, and its principals, Richard Tortora, president, and Richard Ganci, executive vice president, are facing civil fraud charges brought by federal regulators for their role in the August 2019 bond sale for the City of Rochester on behalf of the Rochester City School District. The city and its former director of finance were also named defendants in the lawsuit.

The suit, filed June 14 in U.S. District Court for the Western District of New York, alleges the city, its finance director Rosiland Brooks-Harris, CMA, Tortora and Ganci made materially misleading statements and omissions in the bond offering that concealed the school district’s deteriorated financial condition and concealed the true risk to investors.

The SEC also accuses CMA, Tortora and Ganci with failing to disclose “material conflicts of interests” to its clients, numbering as many as 400 entities, over a period of several years.

Federal regulators allege CMA and Ganci, along with the city and its finance director, violated federal securities law against fraud in the offer or sale of securities. They also allege CMA, Tortora and Ganci violated federal regulations by engaging in deceptive, dishonest or unfair practice, breaching the duties of a municipal advisor, violating supervisory and compliance obligations of municipal advisors and breaching their fiduciary duties.

The consultants’ alleged conflict of interest results from its fee arrangement, where its compensation is “contingent on the size and/or closing of a client’s transaction,” the SEC complaint alleges.

“The conflict arises because, although the client has an interest in issuing as little debt as possible in order to satisfy its need for capital, the municipal advisor has an interest in increasing the size of the client’s debt in order to increase its compensation.”

CMA’s consulting contracts, including its contract with the Town of Riverhead, spell out this “contingent” type of compensation arrangement.

Not only did CMA fail to disclose the conflict, the complaint states, its contracts affirmatively state CMA has no material conflicts of interest to disclose.

Capital Markets Advisors denies the allegations.

“CMA and the City of Rochester plan to mount a vigorous defense and believe we will ultimately be successful,” a company spokesperson told RiverheadLOCAL yesterday.

Riverhead Town Financial Administrator William Rothaar said CMA’s “contingent” fee arrangement is typical of all financial advisors in the field. He said in his 28 years in municipal finance, he’s never seen a different compensation arrangement.

Rothaar said he was not familiar with the underlying circumstances that gave rise to the lawsuit, but CMA’s “billing shouldn’t even be part of it.”

Riverhead Supervisor Yvette Aguiar, the town official ultimately responsible for its finances, said she had already instructed Rothaar to put out a request for proposals for bond counsel and financial advisors prior to learning of the SEC lawsuit.

“It’s been six years, so it’s time,” Aguiar said yesterday.

Riverhead hired CMA following an RFP process initiated in 2015. Prior to signing on with CMA, Riverhead’s financial advisor was Munistat.

Rothaar said he’s been satisfied with CMA and believes the firm has served the town well.

A financial advisor assists the municipality with credit ratings agencies, preparing for a bond sale, preparing the offering documents, and offering the securities for sale. The firm and its principals must register with the Securities and Exchange Commission. CMA has been registered with the SEC since 2014. Tortora has been president and principal of the company since 2002 and Ganci has been executive vice president and principal since March 2005.

Lawsuit stems from Rochester City School District financial scandal

According to the SEC complaint, the City of Rochester sold a $68,905,000 bond anticipation note (“BAN”) and a $50,000,000 revenue anticipation note (“RAN”) in August 2019 on behalf of the city school district.

The school district’s financial condition at the time of the sale was deteriorating. Its fund balances had declined by more than $27 million due to recurring operating deficits between 2014 and 2018. In fiscal year 2019 (July 1, 2018-June 30, 2019) the district had a $63 million cash decline due, in part, to the district’s overspending. “This was an unusually large decline in cash compared to prior years,” the complaint states. “To pay expenses, the District increasingly began to rely on the City for short-term loans.”

The city and its financial director were aware of the school district’s financial problems by July 2019 and began meeting weekly with the district’s financial staff. The financial director was aware of the district’s overspending in fiscal year 2019 “due to increases in teacher salaries” and aware of its $63 million cash decline, according to the complaint. The city decided to issue the notes to avoid making frequent short-term loans to the district.

The SEC said CMA had been the city’s financial advisor since 2008 and Ganci was personally familiar with the city’s and the district’s finances. Specifically, according to the complaint, he knew about the district’s overspending and its decline in fund balance and its unusual $63 million decline cash, the complaint states. He also knew the city was issuing the notes was, “in substantial part,” due to the district’s overspending.

The defendants made “materially misleading statements and omissions” to a credit rating analyst in advance of the offering, the complaint states. City and district representatives told the analyst that the reason for the revenue anticipation notes was “ merely to address a timing issue in the receipt of aid from the State of New York,” the complaint states. “They did not disclose the District’s increased overspending on teacher salaries.”

The district’s then-CFO made false statements to the analyst about the district’s anticipated use of fund balance in 2019, the complaint states. He also falsely stated the $63 million cash decline was “due to accounting treatment and timing issues.”

The city’s finance director and CMA’s Ganci heard the false statements to the analyst and did not correct them, the complaint states. They also did not disclose the district’s overspending on teacher salaries.

The credit analyst thereafter gave the city its highest rating for the short-term debt and maintained the city’s Aa3 rating for its general obligation debt.

The SEC alleges the city made misleading statements and omissions in its offering documents, providing the districts audited financial statements for fiscal year 2018, which were more than a year old at the time of the offering. The prior year’s audited statements did not reflect the district’s extreme cash flow crisis as a result of overspending in fiscal year 2019.

The city’s finance director and CMA failed to request more current financial statements from the district even though they were award of the district’s financial distress, the complaint states.

The offering documents did not disclose the district’s projected year-end results for fiscal year 2019, the complaint states, though this information was known to the city, its financial director, CMA and Ganci at the time of the offering.

The offering documents also stated, falsely, that the proceeds of the revenue anticipation note would be used to offset the effects of timing differences between cash receipts and disbursements in the 2019-2020 fiscal year, when the issuance of the Ran was prompted by the district’s overspending and increasing need for cash, according to the SEC complaint.

The city sold the notes and the deal closed on Aug. 7, 2019.

On Sept. 18, 2019 the district’s external auditor alerted district management that the district was facing a $30 million budget shortfall for fiscal year 2019.

The actual operating deficit for fiscal year 2019 turned out to be $42 million, according to audited financial statements completed in December 2019, a result of overspending of $27.6 million in the fiscal year, which consumed all of the district’s “reserve policy” fund balance as well as $8.9 million of reserves restricted for other purposes, according to the SEC complaint.

The rating agency subsequently downgraded the city’s long-term rating to “A2” and assigned a negative outlook. It also downgraded the city’s rating for its bond anticipation note.

The State of New York in May 2020 made a $35 million loan to the Rochester City School District to address the budget shortfall and the State Education Commissioner appointed a monitor to oversee the district for a three-year period beginning May 2020.

Rochester City School District former budget director hired by Riverhead schools

The Riverhead Central School District last month hired the Rochester City School District’s former budget director, Rodney Asse, as its Assistant Superintendent for Finance and Operations. Asse was the Rochester school district budget director from January 2017 until his resignation in September 2019, immediately after the multimillion deficit became public.

Asse came to the Riverhead school district from Liberty Central School District in upstate Liberty, New York, where he had been employed as a business official. He was initially hired on a per-diem basis and later appointed to a full-time position while Riverhead School Superintendent Augustine Tornatore was the superintendent at Liberty.

In an interview last month, Asse said the Rochester school district’s chief financial officer and superintendent, who both resigned following the reports of the financial situation there, were responsible for the district’s fiscal crisis. As the district’s budget director, Asse said, he was not a member of the superintendent’s cabinet, which managed the district, including its finances. The CFO, he said, “would actually finalize and lead a budget and work with the superintendent.”

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Denise is a veteran local reporter, editor, attorney and former Riverhead Town councilwoman. Her work has been recognized with numerous awards, including investigative reporting and writer of the year awards from the N.Y. Press Association. She is a founder, owner and co-publisher of this website.Email Denise.