WASHINGTON – The Securities and Exchange Commission charged Crosby Independent School District and its former chief financial officer with misleading investors in the sale of $20 million of municipal bonds.
The SEC also charged Crosby’s auditor with improper professional conduct in connection with the audit of the school district’s 2017 fiscal year financial statements.
The SEC’s complaint alleged that Crosby ISD, which serves approximately 6,400 students outside of Houston, failed to report $11.7 million in payroll and construction liabilities and falsely reported having $5.4 million in general fund reserves in its audited 2017 fiscal year financial statements.
According to the complaint, Crosby ISD and ex-CFO Carla Merka, who was responsible for Crosby ISD’s accounting and was the primary contact during the bond financing process, were aware that the financial statements significantly underreported the payroll and construction liabilities. Crosby ISD and Merka knowingly included the false and misleading financial statements in the offering documents used to raise $20 million through the sale of municipal bonds in January 2018.
Seven months after the offering, Crosby ISD disclosed that it was experiencing significant financial issues, including that it had a negative general fund balance. The following month, ratings agencies downgraded Crosby ISD’s bonds.
Shelby Lackey, who audited Crosby ISD’s financial statements, authorized the issuance of the fiscal year 2017 audit report. Lackey was charged by the SEC with failure to perform critical audit procedures necessary to verify the accuracy of Crosby’s payroll and construction liabilities. She also violated Generally Accepted Auditing Standards by failing to obtain sufficient appropriate audit evidence to support the audit opinion, failing to properly supervise the audit, and by failing to exercise professional judgment and maintain professional skepticism.
“Crosby and Merka misled municipal bond investors regarding the truth of Crosby’s financial health, and Lackey’s deficient auditing practices further exposed investors to harm,” said LeeAnn G. Gaunt, chief of the Division of Enforcement's Public Finance Abuse Unit.
Crosby ISD agreed to settle the SEC’s charges by consenting, without admitting or denying any findings, to the entry of an order finding that it violated the antifraud provisions.
The SEC’s complaint against Merka, filed in U.S. District Court for the Southern District of Texas, charged her with violating the antifraud provisions of the securities laws. Without admitting or denying the allegations, Merka agreed to pay a $30,000 penalty and not participate in any future municipal securities offerings. The settlement is subject to court approval.
Lackey agreed to settle the SEC’s action, without admitting or denying any of the findings, by agreeing to be suspended from appearing or practicing before the SEC as an accountant, with the right to apply for reinstatement after three years.
Lackey also agreed to not serve as the engagement manager, engagement partner, or engagement quality control reviewer in connection with any audit expected to be posted in the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system until reinstated by the SEC.