As I wrote in my column today, it’s inexplicable why Kroll Inc. decided not to make a determination about whether the City Council violated section 17(a) of the securities laws.
Kroll and its attorneys said, strangely, last week that they didn’t make the determination because they were supposed to look for violations of the “anti-fraud” provisions of securities laws because that was all that the auditors cared about. Kroll then determined that the council was negligent. Why not conclude that this was a violation of anti-fraud provisions of securities laws?
Kroll’s attorneys said the “negligence-based” elements of securities laws aren’t anti-fraud provisions.
But that’s not true – according to not only Kroll itself, as I showed today, but also according to the city’s own legal advisor.
Yes, SLOP just obtained the famous Bryan Cave Memo that was given to the City Council as they started to prepare to issue disclosures related to the ballpark financing in 2001. The attorney who wrote the memo also personally briefed the council in a closed session.
This is the evidence that the City Council knew it needed to pay attention to the financial disclosures that it approved because it wouldn’t want to violate the anti-fraud provisions of applicable securities laws.
Although as to certain antifraud provisions, the SEC must show that the person acted with “scienter” – that is recklessness or an intent to deceive, manipulate, or defraud – the SEC need only demonstrate that the person acted negligently to establish a violation of other antifraud provisions.
… members of the body approving disclosure documents cannot simply “rubber-stamp” the document. Rather, each member has the responsibility to demonstrate that he or she was actively involved in the process – that is, each person must review the disclosure document, inquire as to the source of the information, ask questions of City officials and other professionals who provided information.
In other words, if the council acted negligently and didn’t do this, as Kroll found, and negligence of this sort is a violation of anti-fraud provisions, then the council violated anti-fraud provisions.
So, if Kroll is to be believed, and the firm was only supposed to make legal conclusions about possible violations of anti-fraud provisions, then why didn’t it make a determination about the negligence-based anti-fraud provisions? It never connected the dots for readers of its report.
That’d be one thing if it was consistent for the rest of the report. Yet, Kroll connected all sorts of dots with regard to high-level city staffers. If they’re all anti-fraud provisions, why did Kroll only analyze which ones the high-level city managers violated and not the ones the council violated?