Fingers in the Till: SEC Charges Texas City Administrator with Falsified Financial Statements to Conceal Embezzlement
Johnson City, Texas, is a city in the very middle of the Texas Hill Country, with a 2020 population of 1627. Johnson City was incorporated in 1879 and named after its founder, Sam E. Johnson, a Texas rancher. It lies amid the so-called “Texas-German” Belt, which originated due to the many German immigrants arriving from 1830 on. (1830 was a time of political unrest in the various German states due to instability in the Habsburg Empire.) German immigration grew especially after 1842 with the establishment of a recruiting and welcoming center for German immigrants in the Texas Hill Country. So, there are Texas towns with names like New Braunfels, and rather good German style beer, throughout the Texas Hill Country.
Johnson City, the County Seat of Bianco County, is located 12 miles west of the Lyndon B. Johnson National Historical Park. Texas Hill Country is, of course, where President Johnson began his career in politics. In 2013, a 27-year-old named Anthony M. Holland, who had worked for at least eight years in administrative positions for several Texas cities and one school district, landed the job of Chief Administrative Officer and City Secretary for Johnson City. In that position, according to the June 16, 2022, Complaint brought by the U.S. Securities and Exchange Commission (“SEC”) in the U.S. District Court for the Western District of Texas, Austin Division (the “Complaint”), Holland was “responsible for the administration and operation of all municipal departments, projects, and oversight of the City’s finances and records. Holland’s responsibilities included directing and maintaining the central accounting system, preparing financial statements, and preparation of information for annual audits and reviewing audit reports.”
The Complaint charged Holland with embezzling approximately $1.12 million from the city over the period of 2015 to 2020, including $107,137 during the 2016 fiscal year. Holland delayed the annual independent audit of the City’s 2016 financial statements. Finally, in 2018, under pressure to release the delayed 2016 financials, he “created the Falsified Documents [the SEC’s term] by changing dates on the City’s 2015 financial statements and audit report.” He then provided the Falsified Documents to the City’s mayor and its municipal advisor, “knowing that the material would be posted to the City’s public website and the EMMA system and made available to investors.”
As I have previously written concerning municipalities and securities (see my Sept. 22, 2020, Blog “SEC Focus on Municipal Securities: Disclosure and Enforcement – the Peculiar Structure of the Municipal Securities Disclosure Regime”), in 1975 the SEC created the Municipal Securities Rule Making Board (“MSRB”) to oversee the ever-growing (in size and importance) market for municipal securities. In 1994 the Commission amended its Rule 15c2-12 to require that municipal securities issuers enter into Continuing Disclosure Agreements (“CDA”) with the investment bank or similar entity marketing the securities at the time of issuance. Since 2008 the original offering documents for municipal securities (typically a Preliminary Offering Statement or POS for marketing and, at issuance, an Offering Statement or OS), as well as annual (or depending on developments, more frequent) filings pursuant to the CDA must be filed electronically on the Electronic Municipal Market Access system, or EMMA, maintained by the MSRB.
Johnson City had issued and sold municipal securities in both 2012 and 2015, and as required by the municipal disclosure rules was obligated under the CDA’s entered at the time of issuance to provide annual audited financial statements, which the Complaint states was within six months after the end of the City’s fiscal year, which is September 30. The Complaint details that Holland transferred between $500 and $10,000 one to three times a month from the city’s cash account to his personal bank accounts and used the monies for living expenses. The Complaint notes that Holland embezzled the following amounts over six fiscal years:
- $69,759 in 2015
- $107,137 in 2016
- $389,497 in 2017
- $168,002 in 2018
- $159,562 in 2019
- $ 229,140 in 2020
Holland put off the 2016 audit with a variety of excuses until May 2018, when a rating agency withdrew its rating on the City’s outstanding securities. Then Holland created the Falsified Documents, using the financial statements and related audit report for 2015 and changing the dates to 2016. Among other falsehoods, the Falsified Documents did not disclose Holland’s embezzlement of $107,137, which equaled almost 5% of the City’s revenue that year.
In February 2020, a financial examiner for a State of Texas entity, which was an investor in the City’s 2015 securities, discovered the Falsified Documents on EMMA and notified the City’s auditor, who in turn informed the City about the false documents AND that the City’s 2016 financial statements had not yet been audited. Holland made “multiple false statements” in response to the City’s ensuing investigation, and also provided the City’s auditor with “a series of fraudulent documents to hide his embezzlement” in connection with the audit of 2017 financial statements. In mid-September the auditor discovered the embezzlement and reported the theft to the police. Holland resigned in September 2020, and in December 2021 was criminally charged by the U.S. Attorney for the Western District of Texas. Holland pled guilty to one count of theft from a State or Local Government of over $1 million for his personal benefit.
What might have happened if the City’s government, municipal securities advisor, and/or outside auditor had been more alert to the failure to deliver audited financial statements for fiscal 2016 by March 31, 2017 (the six-month due date under the CDA’s)? Notionally, Holland’s embezzlement would have been discovered sooner, preventing the thefts of $168,002 in 2018, $159,562 in 2019, and $229,140 in 2020. It might also have stopped some of the theft of $ 389,497 in 2017. But municipal finance and administration tends to be seen by participants as a more “relaxed” environment than other parts of the capital markets. This tendency is unfortunate. As reported in a June 29, 2022, Press Release issued by the MSRB, outstanding municipal securities totaled almost $4.5 trillion as of the first quarter of 2022. Such a significant part of the capital markets deserves more than “relaxed” attitudes.
Holland, without admitting or denying the Commission’s allegations in the Complaint, consented to the entry of a civil judgment enjoining him from future violations and barring him from involvement in the issuance of municipal securities, including the preparation of offering materials or any CDA disclosures. He also agreed to disgorgement, pre-judgment interest, and civil penalties in amounts to be determined. The SEC investigation of this matter was led by its Public Finance Abuse Unit, about which I have also previously written See my June 27, 2022, Blog “Serving the Public? SEC Charges Two Municipalities and Their Leaders with Bond Fraud.” Johnson City, Texas, a small Hill Country town with a population of 1627 in 2020, might well have had insurance against embezzlement by its officials; one hopes so, as a $1.12 million loss is material where the annual City revenue was about $2.1 million, based on information in the Complaint. But there is no insurance against the injury to the community from the breach of trust by a public official. Hopefully Johnson City will recover. And hopefully local authorities will remember the wisdom of President Ronald Reagan in a wholly different context: Trust BUT verify.
If you have any questions about this post or any other related securities or general business law matters, please feel free to contact me at firstname.lastname@example.org.