The U.S. Securities and Exchange Commission (SEC) issued a fine to central California's Westlands Water District for misleading investors.
The Westlands Water District is the country's biggest agricultural water delivery agency, serving Kings and Fresno counties in California. The rare fine was the result of its financial health overstatement when it sold $77 million bonds in October 2012. The Westlands Water District agreed to pay the $125,000 fine.
It was only the second time that the SEC issued this type of financial penalty to a municipal-bond issuer. Westlands Water District general manager Thomas Birmingham will pay a separate $50,000 penalty. Louie David Ciapponi, Westlands Water District former treasurer, will pay a separate $20,000 fine.
According to the federal regulators, the executives of the Westlands Water District were anticipating that the current drought and water shortage would affect the district's income. This scenario would make the bond issue less appealing to potential investors.
Instead of increasing their water rates, the Westlands Water District resorted to an improper accounting method to come up with a more prosperous front.
The Westlands Water District reclassified its $9.8 million of assets as income to show that it has surpassed the desired debt service coverage ratio of 1.25 to 1 each year for the last five years. The SEC said that for reclassifications, the water district's debt coverage ratio should have been 0.11, not 1.25 in 2010.
"[The water district's actions] left investors in the dark about Westlands Water District's true financial condition," said Andrew J. Ceresney, the SEC's enforcement division director.
Westlands Water District provides water for irrigation to 700 farms in San Joaquin Valley. The water provided to 1,000 square miles makes the area the leading producer of vegetables, nuts and fruits in the United States.
According to the SEC, Birmingham once joked of executing "a little Enron accounting" during a board meeting at the Westlands Water District to reach their desired ratio. Enron Corporation is a defunct Houston-based company that closed due to bankruptcy in 2001 following an accounting scandal.
Prior to Enron's bankruptcy, the company had around 20,000 staff members and was one of the leading natural gas, communications, electricity and pulp and paper firms in the world.
Photo: Harold Litwiler | Flickr
