SEC Charges California Water District for Misleading Investors

The U.S. Securities and Exchange Commission (SEC) recently charged California’s largest agricultural water district, Westlands Water District, for misleading investors regarding its financial condition as it issued a $77 million bond offering.

In addition to charging Westlands, the SEC charged the general manager, Thomas Birmingham, and former assistant general manager Louie David Ciapponi.

The company agreed to pay $125,000 to settle the charges, making it only the second municipal issuer to pay a financial penalty in an SEC enforcement action. Separately, Birmingham and Ciapponi agreed to pay penalties of $50,000 and $20,000, respectively, to settle the charges against them.
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Andrew J. Ceresney, director of the SEC Enforcement Division, commented:

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. Issuers must be truthful with investors and we will seek to deter such misconduct through sanctions, including penalties against municipal issuers in appropriate circumstances.

According to the SEC:

• Westlands agreed in prior bond offerings to maintain a 1.25 debt service coverage ratio, which is a measure of an issuer’s ability to make future bond payments.
• Westlands learned in 2010 that drought conditions and reduced water supply would prevent the water district from generating enough revenue to maintain a 1.25 ratio.
• In order to meet the 1.25 ratio without raising rates on water customers, Westlands used extraordinary accounting transactions that reclassified funds from reserve accounts to record additional revenue.
• Birmingham jokingly referred to these transactions as “a little Enron accounting” when describing them to the board of directors, which is comprised of Westlands customers.
• When Westlands issued the $77 million bond offering in 2012, it represented to investors that it met or exceeded the 1.25 ratio for each of the prior five years.
• Not only did Westlands fail to disclose that wouldn’t have been possible without the extraordinary 2010 accounting transactions, but also omitted separate accounting adjustments made in 2012 that would have negatively affected the ratio had they been done in 2010.
• Had the 2010 reclassifications and the effect of the 2012 adjustments been disclosed, Westlands’ coverage ratio for 2010 would have been only 0.11 instead of the 1.25 reported to investors.
• Birmingham and Ciapponi improperly certified the accuracy of the bond offering documents.