California’s Largest Water District Fined by SEC

Westlands Water District Accused of Misleading Investors

The Securities and Exchange Commission issued a rare fine on Wednesday to the state’s largest water district.

Westlands Water District was fined $125,000 for shifting about $8.3 million in expenses and other obligations to the revenue side of its ledgers and overstated the agency’s revenue to avoid increasing rates for customers. The agency allegedly falsified its debt service funds and financial condition at the time of a $77 million bond offering in 2012.

“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 SEC’s 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.”

At the time of the incident, Westlands executives were expecting water scarcity and drought to cut into the district’s revenue, potentially making the water agency’s bond issue less attractive to investors, regulators said.

The water district’s actions “left investors in the dark about Westlands Water District’s true financial condition,” Ceresney said in the statement. At issue was a “debt service coverage ratio” a measure of the district’s ability to meet its debt obligation. Because of the district’s “extraordinary accounting procedures” that figure was 10 times higher than it would have been using conventional accounting procedures, the SEC said.

According to the Los Angeles Time, Westlands is one of the chief supporters of the $15 billion plan to build tunnels under the Sacramento-San Joaquin River Delta to bring more water directly from the Sacramento River to Southern California. Westlands Water District stretches some 70 miles along the western side of the San Joaquin Valley and is run by some of the state’s wealthiest growers.

Westlands had recently expressed an interest in purchasing land in the California Delta that the Metropolitan Water District voted to enter escrow with Delta Wetlands Properties this week. The land purchase covers more than 20,000 acres and is spread among in the counties of Contra Costa, San Joaquin and Solano.

In settling the case the district’s General Manager, Thomas W. Birmingham, paid a $50,000 penalty and former district Treasurer/Assistant General Manager Louie David Ciapponi agreed to pay a $20,000 penalty.  The district’s liability was $125,000.

Westlands and its administrators did not acknowledge guilt. The accounting procedures at issue were approved by an independent auditor, according to the district.

“Westlands, Birmingham and Ciapponi determined that entering into the settlement to fully resolve the matter was in the district’s best interest,” the statement said.

The SEC’s first financial penalty levied against a municipal issuer was significantly less than Westlands’ fine. In November 2013, Washington state’s Greater Wenatchee Regional Events Center Public Facilities District was charged with misleading investors in a bond offering that financed the construction of a regional events center and ice hockey arena. The Washington district settled with the SEC for $20,000.