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The Daily

SEC Accuses CA Water District of Using 'A Little Enron Accounting'

Chris Gaetano
Published Date:
Mar 10, 2016

By Nikthestoned - Own work - also at Flickr, CC BY-SA 3.0The Securities and Exchange Commission has charged the Westlands Water District, the largest in California, with using Enron-style accounting during a $77 million public bond offering. The water district, in a previous bond offering, agreed to maintain a certain cash flow level in order to cover future bond payments. However, when drought struck California in 2010, the district learned that it would not be able to generate enough revenue to maintain cash flows at the level it had promised. To compensate, the water district started reclassifying funds from reserve accounts as additional revenue, according to the SEC. 

When presenting these transactions to the board of directors, General Manager Thomas Birmingham jokingly referred to it as "a little Enron accounting." 

When the Westlands Water District made a new, $77 million bond offering in 2012, it told investors that it met or exceeded the promised cash flows for the past five years. The SEC said that the district failed to disclose that it would not have never been able to maintain this cash flow without tapping into the reserves. On top of this, according to the SEC, the district also omitted separate accounting adjustments made in 2012 that would have negatively affected the promised cash flow had it been reported in 2010. 

The SEC also faulted Birmingham and former assistant general manager Louie David Ciapponi for certifying the accuracy of the bond reporting documents. 

Westlands 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.  Birmingham and Ciapponi agreed to pay penalties of $50,000 and $20,000 respectively to settle the charges against them.

“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,” said Andrew J. Ceresney, Director of the SEC Enforcement Division.  “Issuers must be truthful with investors and we will seek to deter such misconduct through sanctions, including penalties against municipal issuers in appropriate circumstances.”