SEC v. Karen Marie Michel, No. 3:21-cv-01623, Southern District of California (Sept. 22, 2021) — Complaint

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ERIN E. SCHNEIDER (Cal. Bar No. 216114)
MONIQUE C. WINKLER (Cal. Bar No. 213031)
JASON H. LEE (Cal. Bar No. 253140)
Email:  [email protected]
WILLIAM T. SALZMANN (Cal. Bar No. 205808)
Email:  [email protected]
JESSICA A. ADAMS (NY Bar No. 4789103)
Email:  [email protected]
A
ttorneys for Plaintiff
Securities and Exchange Commission
44 Montgomery Street, Suite 2800
San Francisco, CA 94104
Telephone: (415) 705-2500
Facsimile: (415) 705-2501
UNI
TED STATES DISTRICT COURT
SOUTHERN DISTRICT OF CALIFORNIA
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
vs.
KAREN MARIE MICHEL,
Defendant.
Case No.
COMPLAINT FOR INJUNCTIVE
AND OTHER RELIEF
P
laintiff Securities and Exchange Commission (“the Commission”) alleges as
follows:
INTRODUCTION
1.This matter involves a deceptive course of business, including material
m
isstatements and omissions, by Karen Michel, the former Chief Financial Officer of
Sweetwater Union High School District (“Sweetwater” or “the District”),  in
'21CV1623BGSL

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connection with the sale of $28 million of municipal bonds in April 2018 offered by
the District.  The bonds were to be secured by and payable from ad valorem property
taxes assessed on taxable properties within the school district and collected by the
County of San Diego.  The purpose of the bonds was to fund certain of Sweetwater’s
capital projects.
2. In the documents Sweetwater and Michel used to offer the bonds to
investors – a   Preliminary Official Statement and a Final Official Statement (together,
the “Offering Documents”) – Michel included misleading budget projections which
indicated that the District could cover its costs, when in reality the District’s finances
were severely strained.  Although Michel was aware of information showing that the
projections were untenable, she omitted this fact when she helped prepare and
reviewed the Offering Documents, which indicated   that Sweetwater would end the
fiscal year with a positive general fund balance of approximately $19.5 million.
Months later, when Sweetwater ultimately disclosed its true year-end financial
condition, it had to reveal that it had actually overspent its budget by $28 million, and
had ended the year with a negative $7.2 million fund balance.
3. The Offering Documents also misleadingly stated that Sweetwater had
obtained positive budget certifications for each of its state-mandated reporting
periods during the preceding five years and that its budget reporting incorporated
current financial information, while omitting the fact that the District made no effort
to incorporate known expenses into the projections used for the certified budgets.
4. The omitted information rendered the projections and statements about
Sweetwater’s financial performance that were included in the Offering Documents
materially misleading.  Michel also presented the deceptive budget figures to a credit
rating agency in connection with obtaining credit ratings related to the bond offering,
and submitted false certifications regarding the accuracy and completeness of the
Offering Documents to the team of professionals who worked on the deal.  After the
deficit was discovered in the fall of 2018, the credit rating agency ultimately

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published a downgrade in connection with the “significant deterioration” of the
District’s financial condition.
5. As a result of the conduct described above, Michel violated Section
17(a)(3) of the Securities Act of 1933 (“Securities Act”).
JURISDICTION AND VENUE
6. The Court has jurisdiction over this action pursuant to 28 U.S.C. § 1331
and Sections 20(b), 20(d), and 22(a) of the Securities Act [15 U.S.C. §§ 77t(b),
77t(d), 77v(a)].
7. Defendant has, directly or indirectly, made use of the means or
instrumentalities of interstate commerce or of the mails, in connection with the
transactions, acts, practices, and courses of business alleged in this Complaint.
8. Venue is proper in this district pursuant to Section 22(a) of the Securities
Act [15 U.S.C. § 77v(a)] because Sweetwater is located and Michel resides within
this district and certain of the transactions, acts, practices, and courses of conduct
constituting violations of the federal securities laws occurred within this district.
THE DEFENDANT
9. Michel resides in San Diego County, California.  Michel worked in
Sweetwater’s Financial Services Department from 1996 through 2018, and led the
department as the District’s Chief Financial Officer and chief business officer from
2014 through 2018.  As the CFO, Michel had primary responsibility over
Sweetwater’s bond, business, and finance programs.  Michel retired from Sweetwater
in or around September 2018.
RELEVANT ENTITY
10. Sweetwater is a public school district based in Chula Vista, California
and serving approximately 47,000 students in San Diego County.  It is governed by a
five-member elected Board of Trustees (the “Board”).  Sweetwater operates on a July
1 to June 30 fiscal year.

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FACTUAL ALLEGATIONS
A. Sweetwater Did Not Accurately Consider Expenses Associated with
Recent Salary Increases in the District’s 2018 Fiscal Year Budget.
11. From 2014 through 2018, Michel ran Sweetwater’s Fiscal Services
Division and was in charge of the District’s budget and financial reporting processes.
These responsibilities included supervising the persons who generated Sweetwater’s
budget estimates as well as associated reports comparing the budget estimates to
actual expenses incurred during the year.  She was chiefly responsible for setting up
the control environment meant to ensure the accuracy of the budget estimates, and
was the primary communicator of the adopted and interim budget estimates to the
District’s Board, the San Diego County Office of Education, and ultimately to
investors in the April 2018 bonds.
12. In June 2017, Sweetwater’s Board completed its approval of salary raises
for most of the District’s employees, retroactive to January 2017.  Michel participated in
the Board meeting considering the raises, and assessed both their short-term and long-
term financial impact.  Days after the June 2017 approval of the raises, Michel and
Sweetwater staff working under her direction, completed the proposed budget for the
July 1, 2017 through June 30, 2018 fiscal year (the “2018 Fiscal Year”).  This budget
was then approved and adopted by the Board on Michel’s recommendation.  The
adopted budget, however, failed to accurately account for the 3.75% salary increases,
and instead included a less than 1% increase in employee salaries based on year-end
estimates for the prior fiscal year.  The adopted budget further projected that
Sweetwater would end the year with an operating surplus and a positive general fund
balance of $22.2 million.
B. Michel Ignored Reports Showing That Sweetwater’s Actual Expenses
Were Not in Line with Its Budget Projections.
13. Throughout the 2018 Fiscal Year, Sweetwater’s Fiscal Services Division
created multiple reports indicating that the District’s year-end expenses were trending

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much higher than it had anticipated in its adopted budget.  Michel oversaw the creation
of these reports and was aware of their contents.  As is required for public school
districts under California state law, Sweetwater reviewed its budget in a “first
interim” report, covering the months from July through October, and a “second
interim” report, covering the months from July through January.
14. California Assembly Bill 1200 (“AB 1200”), enacted into law in 1991,
defines a system of fiscal accountability for school districts designed, in part, to aid
county offices of education or other governing bodies to identify school districts’
potential year-end budget deficits.  Among other things, the law requires public
school districts’ interim reporting to be based on current information.  However,
despite AB 1200’s requirement that interim reporting use current financial information,
Sweetwater and Michel failed to implement any system or process for incorporating
actual expenditures into their interim projections.  Thus, while Michel and her staff
reviewed Sweetwater’s expenditures for other purposes, and even created reports
directly comparing actual expenditures with incompatible year-end projections, Michel
failed to take any steps to make adjustments to the District’s budget projections based
on these comparisons.
15. By December 2017, Sweetwater’s first interim report showed that the
District’s monthly salary expenditures significantly exceeded the amounts anticipated in
its budget.  Nevertheless, Michel made no effort to incorporate these actual expenses
into the year-end projections included in the same report.  Instead, she continued to rely
on stale projections aligned with the District’s months-old adopted budget.
16. Michel repeated the same process with the District’s second interim report,
which purportedly represented the District’s financial condition through January 2018.
As of January 31, 2018, the actual employee salary expenses indicated a year-end
budget variance of over $12.5 million from Sweetwater’s second interim budget
projections and showed that the District was engaged in significant deficit spending.
However, Sweetwater and Michel failed to update the budget projections in

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Sweetwater’s second interim report, completed on or about March 9, 2018, to reflect the
increasing gap between the District’s actual salary expenses and its budget.  Instead,
Michel and Sweetwater continued to rely on the stale projections that misleadingly
showed that the District would end the fiscal year with a general fund balance of
approximately $19.5 million.
C. Michel Used the Misleading Budget Projections to Facilitate Sweetwater’s
Sale of $28 Million in Bonds to Investors.
17. On February 26, 2018, Sweetwater’s Board voted to approve the issuance
of $28 million in general obligation bonds.
18. On or about February 27, 2018, Michel represented Sweetwater during a
meeting with a credit rating agency to present the April 2018 bonds and to provide
financials relevant to the District’s credit profile.  As part of the meeting, Sweetwater’s
municipal advisor presented the District’s misleading budget projections from its
interim reporting, which Michel and her staff had provided.  Even though Sweetwater’s
municipal advisor had specifically informed Michel that the financial information
provided to the credit rating agency needed to be complete and accurate, Michel failed
to disclose that the District’s actual expenses were trending significantly higher than the
budget projections that were provided and that the projections were not supported by
more recent internal reports.
19. Based in part on Sweetwater’s misleading financial information, on or
about March 9, 2018, the credit rating agency published an issuer-default rating for the
District of “A,” explaining to investors, among other things, that it “expects reserves to
hold above the state’s 2% minimum fund balance requirement for the district due to
strong state oversight of the district’s budgets,” “[t]he district budgets conservatively,”
and the rating agency “expects the district to actively manage expenditures to address
potential budget gaps.”
20. On March 22, 2018, Sweetwater disseminated the April 2018 bonds’
Preliminary Official Statement (“Preliminary OS”) to potential bond investors, which

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included the misleading budget projections from the District’s interim reporting.
Specifically, in the Preliminary OS, Sweetwater represented that it projected a
$19.5 million year-end general fund balance for the 2018 Fiscal Year, while omitting
the fact that the projections were at odds with internal reports of known actual expenses.
21. Additionally, Sweetwater and Michel represented that the District filed
positive certifications for each reporting period in the previous five years in accordance
with AB 1200, noted that a “positive certification is assigned to any school district that
will meet its financial obligations for the current fiscal year and subsequent two fiscal
years,” and described AB 1200’s requirement that interim reporting be based on current
information, while misleadingly omitting the fact that the District made no effort to
incorporate current expense data into its interim projections.
22. On April 4, 2018, Sweetwater disseminated the April 2018 bonds’ Final
Official Statement (“Final OS”) to investors, making the same misrepresentations and
omissions as in the Preliminary OS.
23. Michel was substantially involved in the drafting and dissemination of the
misleading information in the Offering Documents to investors.  She and staff that she
oversaw within Sweetwater’s Fiscal Services Division provided the misleading budget
projections to the counsel responsible for drafting the Preliminary OS and Final OS.
Michel then reviewed drafts of both documents, and took steps to facilitate their
dissemination.  On behalf of the District, she signed a certificate authorizing the
dissemination of the Preliminary OS to investors, and ultimately provided the issuer
signature in the Final OS representing that Sweetwater had “authorized and approved”
the document.
24. Additionally, Michel sent false certifications to the underwriter and other
gatekeepers to the bond offering.  On April 4, 2018, Michel signed a “bond purchase
agreement” in which she and the District “represent[ed], warrant[ed] and agree[d]” that
(i) the Preliminary OS and Final OS did not contain any untrue statement of material
fact or omit to state any material fact necessary to make the statements therein not

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misleading; and (ii) that the financial statements included in the Final OS fairly
presented the financial position of Sweetwater for the periods they purported to
represent.  The bond purchase agreement was provided to the group of professionals
facilitating the offering, including the underwriter and its counsel, bond counsel,
disclosure counsel, and Sweetwater’s municipal advisor (collectively, the “Bond Deal
Team Members”).
25. On April 25, 2018, Michel signed a closing certificate on behalf of
Sweetwater in which she represented that she had reviewed the Final OS, and then
misleadingly certified that the Final OS did not contain any untrue statement of a
material fact required to be stated therein, or necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading.  This
certification was provided to the underwriter, underwriter’s counsel, and bond counsel.
26. Michel never informed any of the Bond Deal Team Members that the
budget projections included in the Offering Documents were contradicted by the
District’s known actual expenses and the District had no process in place to incorporate
actual expenditures into its projections.
27. Michel failed to exercise reasonable care when she used misleading
budget projections to sell the April 2018 bonds.  Her use of, and representations relating
to, these budget projections in communications with investors, the credit rating agency,
and the Bond Deal Team Members was not reasonable in light of contrary and more
recent internal reports known to Michel.
D. Sweetwater’s New CFO Uncovers the District’s Substantial Deficit,
Leading to a Rating Downgrade.
28. In or around September 2018, Michel retired from Sweetwater and was
replaced by a new CFO.  Under the new CFO’s direction, the District completed its
unaudited actual financial report for the 2018 Fiscal Year, finding that year-end
salary expenditures were approximately $309.6 million – $18.7 million higher than
estimated in the second interim report and as presented to investors in the Offering

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Documents.  As a result of these expenses, as well as a shortfall in projected revenue,
Sweetwater’s unaudited general fund balance dropped to approximately negative
$2.87 million, approximately $22.4 million less than was reported in the Offering
Documents.
29. On October 26, 2018, after learning of the District’s strained financial
condition, the credit rating agency downgraded Sweetwater’s issuer-default rating
two notches from “A” to “BBB+,” with a negative outlook.  In explaining the
downgrade, the credit rating agency noted that its action was “triggered by significant
deterioration in the District’s financial position compared to prior expectations” and
stated a “concern that expenditure control needed to stabilize its finances will be a
challenge for the district.”  Additionally, another credit rating agency, which covered an
earlier series of Sweetwater’s general obligation bonds, downgraded its rating of the
prior bonds two notches from “A1” to “A3” with a negative outlook.  In reporting its
downgrade, this credit rating agency cited, among other things, the District’s
“materially weakened financial position” and “poor financial reporting.”
30. On December 5, 2018, Sweetwater’s independent auditor completed its
audit of the District’s 2018 Fiscal Year financial report.  The audited financials revealed
an even lower year-end general fund balance of negative $7.2 million based on total
deficit spending of approximately $28.7 million.
CLAIM FOR RELIEF
Violation of Section 17(a)(3) of the Securities Act
31. Paragraphs 1 through 30 are hereby re-alleged and are incorporated herein
by reference.
32. By reason of the foregoing, Michel directly or indirectly, in the offer or
sale of securities, by use of the means or instruments of transportation or
communication in interstate commerce or by use of the mails, engaged in transactions,
practices, or courses of business which operated or would operate as a fraud or deceit
upon the purchasers.

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33. By reason of the foregoing, Michel directly or indirectly, violated and
unless enjoined will continue to violate, Section 17(a)(3) of the Securities Act [15
U.S.C. § 77q(a)(3)].
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that the Court:
I.

Issue findings of fact and conclusions of law that Defendant violated Section
17(a)(3) of the Securities Act [15 U.S.C. § 77q(a)(3)].
II.

Issue a judgment permanently restraining and enjoining Defendant and her
agents, servants, employees, and attorneys, and those persons in active concert or
participation with any of them, who receive actual notice of the judgment by personal
service or otherwise, from directly or indirectly violating Section 17(a)(3) of the
Securities Act [15 U.S.C. § 77q(a)(3)].
III.

Issue a judgment permanently restraining and enjoining Defendant from
participating in any offering of municipal securities, including engaging in activities
with a broker, dealer, or issuer for purposes of issuing, trading, or inducing or
attempting to induce the purchase or sale of any municipal security; provided
however, that such injunction shall not prevent Defendant from purchasing or selling
municipal securities for her own personal accounts.
IV.

Order Defendant to pay civil penalties pursuant to Section 20(d) of the
Securities Act [15 U.S.C. § 78t(d)].
V.

Retain jurisdiction of this action in accordance with the principles of equity and
the Federal Rules of Civil Procedure in order to implement and carry out the terms of
all orders and decrees that may be entered, or to entertain any suitable application or

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motion for additional relief within the jurisdiction of this Court.
VI.
G
rant such other relief as this Court may deem just and appropriate.
Da
ted:  September 16, 2021 Respectfully Submitted,
/s/ Jessica A. Adams
Jessica A. Adams
Attorney for Plaintiff
SECURITIES AND EXCHANGE
COMMISSION

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ERIN E. SCHNEIDER (Cal. Bar No. 216114) 
MONIQUE C. WINKLER (Cal. Bar No. 213031) 
JASON H. LEE (Cal. Bar No. 253140) 
Email:  [email protected] 
WILLIAM T. SALZMANN (Cal. Bar No. 205808) 
Email:  [email protected] 
JESSICA A. ADAMS (NY Bar No. 4789103) 
Email:  [email protected] 

Attorneys for Plaintiff 
Securities and Exchange Commission 
44 Montgomery Street, Suite 2800 
San Francisco, CA 94104 
Telephone: (415) 705-2500 
Facsimile: (415) 705-2501  

UNITED STATES DISTRICT COURT 

SOUTHERN DISTRICT OF CALIFORNIA 

SECURITIES AND EXCHANGE 
COMMISSION, 

Plaintiff, 

vs. 

KAREN MARIE MICHEL, 

Defendant. 

Case No. 

COMPLAINT FOR INJUNCTIVE 
AND OTHER RELIEF 

Plaintiff Securities and Exchange Commission (“the Commission”) alleges as 

follows: 

INTRODUCTION 

1. This matter involves a deceptive course of business, including material

misstatements and omissions, by Karen Michel, the former Chief Financial Officer of 

Sweetwater Union High School District (“Sweetwater” or “the District”), in 

'21CV1623 BGSL

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connection with the sale of $28 million of municipal bonds in April 2018 offered by 

the District.  The bonds were to be secured by and payable from ad valorem property 

taxes assessed on taxable properties within the school district and collected by the 

County of San Diego.  The purpose of the bonds was to fund certain of Sweetwater’s 

capital projects. 

2. In the documents Sweetwater and Michel used to offer the bonds to 

investors – a Preliminary Official Statement and a Final Official Statement (together, 

the “Offering Documents”) – Michel included misleading budget projections which 

indicated that the District could cover its costs, when in reality the District’s finances 

were severely strained.  Although Michel was aware of information showing that the 

projections were untenable, she omitted this fact when she helped prepare and 

reviewed the Offering Documents, which indicated that Sweetwater would end the 

fiscal year with a positive general fund balance of approximately $19.5 million.  

Months later, when Sweetwater ultimately disclosed its true year-end financial 

condition, it had to reveal that it had actually overspent its budget by $28 million, and 

had ended the year with a negative $7.2 million fund balance.   

3. The Offering Documents also misleadingly stated that Sweetwater had 

obtained positive budget certifications for each of its state-mandated reporting 

periods during the preceding five years and that its budget reporting incorporated 

current financial information, while omitting the fact that the District made no effort 

to incorporate known expenses into the projections used for the certified budgets. 

4. The omitted information rendered the projections and statements about 

Sweetwater’s financial performance that were included in the Offering Documents 

materially misleading.  Michel also presented the deceptive budget figures to a credit 

rating agency in connection with obtaining credit ratings related to the bond offering, 

and submitted false certifications regarding the accuracy and completeness of the 

Offering Documents to the team of professionals who worked on the deal.  After the 

deficit was discovered in the fall of 2018, the credit rating agency ultimately 

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published a downgrade in connection with the “significant deterioration” of the 

District’s financial condition. 

5. As a result of the conduct described above, Michel violated Section 

17(a)(3) of the Securities Act of 1933 (“Securities Act”). 

JURISDICTION AND VENUE 

6. The Court has jurisdiction over this action pursuant to 28 U.S.C. § 1331 

and Sections 20(b), 20(d), and 22(a) of the Securities Act [15 U.S.C. §§ 77t(b), 

77t(d), 77v(a)].  

7. Defendant has, directly or indirectly, made use of the means or 

instrumentalities of interstate commerce or of the mails, in connection with the 

transactions, acts, practices, and courses of business alleged in this Complaint.  

8. Venue is proper in this district pursuant to Section 22(a) of the Securities 

Act [15 U.S.C. § 77v(a)] because Sweetwater is located and Michel resides within 

this district and certain of the transactions, acts, practices, and courses of conduct 

constituting violations of the federal securities laws occurred within this district.   

THE DEFENDANT 

9. Michel resides in San Diego County, California.  Michel worked in 

Sweetwater’s Financial Services Department from 1996 through 2018, and led the 

department as the District’s Chief Financial Officer and chief business officer from 

2014 through 2018.  As the CFO, Michel had primary responsibility over 

Sweetwater’s bond, business, and finance programs.  Michel retired from Sweetwater 

in or around September 2018.  

RELEVANT ENTITY 

10. Sweetwater is a public school district based in Chula Vista, California 

and serving approximately 47,000 students in San Diego County.  It is governed by a 

five-member elected Board of Trustees (the “Board”).  Sweetwater operates on a July 

1 to June 30 fiscal year. 

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FACTUAL ALLEGATIONS 

A. Sweetwater Did Not Accurately Consider Expenses Associated with 

Recent Salary Increases in the District’s 2018 Fiscal Year Budget. 

11. From 2014 through 2018, Michel ran Sweetwater’s Fiscal Services 

Division and was in charge of the District’s budget and financial reporting processes.  

These responsibilities included supervising the persons who generated Sweetwater’s 

budget estimates as well as associated reports comparing the budget estimates to 

actual expenses incurred during the year.  She was chiefly responsible for setting up 

the control environment meant to ensure the accuracy of the budget estimates, and 

was the primary communicator of the adopted and interim budget estimates to the 

District’s Board, the San Diego County Office of Education, and ultimately to 

investors in the April 2018 bonds.  

12. In June 2017, Sweetwater’s Board completed its approval of salary raises 

for most of the District’s employees, retroactive to January 2017.  Michel participated in 

the Board meeting considering the raises, and assessed both their short-term and long-

term financial impact.  Days after the June 2017 approval of the raises, Michel and 

Sweetwater staff working under her direction, completed the proposed budget for the 

July 1, 2017 through June 30, 2018 fiscal year (the “2018 Fiscal Year”).  This budget 

was then approved and adopted by the Board on Michel’s recommendation.  The 

adopted budget, however, failed to accurately account for the 3.75% salary increases, 

and instead included a less than 1% increase in employee salaries based on year-end 

estimates for the prior fiscal year.  The adopted budget further projected that 

Sweetwater would end the year with an operating surplus and a positive general fund 

balance of $22.2 million. 

B. Michel Ignored Reports Showing That Sweetwater’s Actual Expenses 

Were Not in Line with Its Budget Projections. 

13. Throughout the 2018 Fiscal Year, Sweetwater’s Fiscal Services Division 

created multiple reports indicating that the District’s year-end expenses were trending 

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much higher than it had anticipated in its adopted budget.  Michel oversaw the creation 

of these reports and was aware of their contents.  As is required for public school 

districts under California state law, Sweetwater reviewed its budget in a “first 

interim” report, covering the months from July through October, and a “second 

interim” report, covering the months from July through January.   

14. California Assembly Bill 1200 (“AB 1200”), enacted into law in 1991, 

defines a system of fiscal accountability for school districts designed, in part, to aid 

county offices of education or other governing bodies to identify school districts’ 

potential year-end budget deficits.  Among other things, the law requires public 

school districts’ interim reporting to be based on current information.  However, 

despite AB 1200’s requirement that interim reporting use current financial information, 

Sweetwater and Michel failed to implement any system or process for incorporating 

actual expenditures into their interim projections.  Thus, while Michel and her staff 

reviewed Sweetwater’s expenditures for other purposes, and even created reports 

directly comparing actual expenditures with incompatible year-end projections, Michel 

failed to take any steps to make adjustments to the District’s budget projections based 

on these comparisons. 

15. By December 2017, Sweetwater’s first interim report showed that the 

District’s monthly salary expenditures significantly exceeded the amounts anticipated in 

its budget.  Nevertheless, Michel made no effort to incorporate these actual expenses 

into the year-end projections included in the same report.  Instead, she continued to rely 

on stale projections aligned with the District’s months-old adopted budget.   

16. Michel repeated the same process with the District’s second interim report, 

which purportedly represented the District’s financial condition through January 2018.  

As of January 31, 2018, the actual employee salary expenses indicated a year-end 

budget variance of over $12.5 million from Sweetwater’s second interim budget 

projections and showed that the District was engaged in significant deficit spending.  

However, Sweetwater and Michel failed to update the budget projections in 

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Sweetwater’s second interim report, completed on or about March 9, 2018, to reflect the 

increasing gap between the District’s actual salary expenses and its budget.  Instead, 

Michel and Sweetwater continued to rely on the stale projections that misleadingly 

showed that the District would end the fiscal year with a general fund balance of 

approximately $19.5 million. 

C. Michel Used the Misleading Budget Projections to Facilitate Sweetwater’s 

Sale of $28 Million in Bonds to Investors. 

17. On February 26, 2018, Sweetwater’s Board voted to approve the issuance 

of $28 million in general obligation bonds. 

18. On or about February 27, 2018, Michel represented Sweetwater during a 

meeting with a credit rating agency to present the April 2018 bonds and to provide 

financials relevant to the District’s credit profile.  As part of the meeting, Sweetwater’s 

municipal advisor presented the District’s misleading budget projections from its 

interim reporting, which Michel and her staff had provided.  Even though Sweetwater’s 

municipal advisor had specifically informed Michel that the financial information 

provided to the credit rating agency needed to be complete and accurate, Michel failed 

to disclose that the District’s actual expenses were trending significantly higher than the 

budget projections that were provided and that the projections were not supported by 

more recent internal reports.   

19. Based in part on Sweetwater’s misleading financial information, on or 

about March 9, 2018, the credit rating agency published an issuer-default rating for the 

District of “A,” explaining to investors, among other things, that it “expects reserves to 

hold above the state’s 2% minimum fund balance requirement for the district due to 

strong state oversight of the district’s budgets,” “[t]he district budgets conservatively,” 

and the rating agency “expects the district to actively manage expenditures to address 

potential budget gaps.” 

20. On March 22, 2018, Sweetwater disseminated the April 2018 bonds’ 

Preliminary Official Statement (“Preliminary OS”) to potential bond investors, which 

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included the misleading budget projections from the District’s interim reporting.  

Specifically, in the Preliminary OS, Sweetwater represented that it projected a 

$19.5 million year-end general fund balance for the 2018 Fiscal Year, while omitting 

the fact that the projections were at odds with internal reports of known actual expenses.   

21. Additionally, Sweetwater and Michel represented that the District filed 

positive certifications for each reporting period in the previous five years in accordance 

with AB 1200, noted that a “positive certification is assigned to any school district that 

will meet its financial obligations for the current fiscal year and subsequent two fiscal 

years,” and described AB 1200’s requirement that interim reporting be based on current 

information, while misleadingly omitting the fact that the District made no effort to 

incorporate current expense data into its interim projections.   

22. On April 4, 2018, Sweetwater disseminated the April 2018 bonds’ Final 

Official Statement (“Final OS”) to investors, making the same misrepresentations and 

omissions as in the Preliminary OS. 

23. Michel was substantially involved in the drafting and dissemination of the 

misleading information in the Offering Documents to investors.  She and staff that she 

oversaw within Sweetwater’s Fiscal Services Division provided the misleading budget 

projections to the counsel responsible for drafting the Preliminary OS and Final OS.  

Michel then reviewed drafts of both documents, and took steps to facilitate their 

dissemination.  On behalf of the District, she signed a certificate authorizing the 

dissemination of the Preliminary OS to investors, and ultimately provided the issuer 

signature in the Final OS representing that Sweetwater had “authorized and approved” 

the document. 

24. Additionally, Michel sent false certifications to the underwriter and other 

gatekeepers to the bond offering.  On April 4, 2018, Michel signed a “bond purchase 

agreement” in which she and the District “represent[ed], warrant[ed] and agree[d]” that 

(i) the Preliminary OS and Final OS did not contain any untrue statement of material 

fact or omit to state any material fact necessary to make the statements therein not 

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misleading; and (ii) that the financial statements included in the Final OS fairly 

presented the financial position of Sweetwater for the periods they purported to 

represent.  The bond purchase agreement was provided to the group of professionals 

facilitating the offering, including the underwriter and its counsel, bond counsel, 

disclosure counsel, and Sweetwater’s municipal advisor (collectively, the “Bond Deal 

Team Members”).   

25. On April 25, 2018, Michel signed a closing certificate on behalf of 

Sweetwater in which she represented that she had reviewed the Final OS, and then 

misleadingly certified that the Final OS did not contain any untrue statement of a 

material fact required to be stated therein, or necessary to make the statements therein, 

in light of the circumstances in which they were made, not misleading.  This 

certification was provided to the underwriter, underwriter’s counsel, and bond counsel.   

26. Michel never informed any of the Bond Deal Team Members that the 

budget projections included in the Offering Documents were contradicted by the 

District’s known actual expenses and the District had no process in place to incorporate 

actual expenditures into its projections. 

27. Michel failed to exercise reasonable care when she used misleading 

budget projections to sell the April 2018 bonds.  Her use of, and representations relating 

to, these budget projections in communications with investors, the credit rating agency, 

and the Bond Deal Team Members was not reasonable in light of contrary and more 

recent internal reports known to Michel.  

D. Sweetwater’s New CFO Uncovers the District’s Substantial Deficit, 

Leading to a Rating Downgrade.   

28. In or around September 2018, Michel retired from Sweetwater and was 

replaced by a new CFO.  Under the new CFO’s direction, the District completed its 

unaudited actual financial report for the 2018 Fiscal Year, finding that year-end 

salary expenditures were approximately $309.6 million – $18.7 million higher than 

estimated in the second interim report and as presented to investors in the Offering 

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Documents.  As a result of these expenses, as well as a shortfall in projected revenue, 

Sweetwater’s unaudited general fund balance dropped to approximately negative 

$2.87 million, approximately $22.4 million less than was reported in the Offering 

Documents. 

29. On October 26, 2018, after learning of the District’s strained financial 

condition, the credit rating agency downgraded Sweetwater’s issuer-default rating 

two notches from “A” to “BBB+,” with a negative outlook.  In explaining the 

downgrade, the credit rating agency noted that its action was “triggered by significant 

deterioration in the District’s financial position compared to prior expectations” and 

stated a “concern that expenditure control needed to stabilize its finances will be a 

challenge for the district.”  Additionally, another credit rating agency, which covered an 

earlier series of Sweetwater’s general obligation bonds, downgraded its rating of the 

prior bonds two notches from “A1” to “A3” with a negative outlook.  In reporting its 

downgrade, this credit rating agency cited, among other things, the District’s 

“materially weakened financial position” and “poor financial reporting.” 

30. On December 5, 2018, Sweetwater’s independent auditor completed its 

audit of the District’s 2018 Fiscal Year financial report.  The audited financials revealed 

an even lower year-end general fund balance of negative $7.2 million based on total 

deficit spending of approximately $28.7 million. 

CLAIM FOR RELIEF 

Violation of Section 17(a)(3) of the Securities Act 

31. Paragraphs 1 through 30 are hereby re-alleged and are incorporated herein 

by reference.  

32. By reason of the foregoing, Michel directly or indirectly, in the offer or 

sale of securities, by use of the means or instruments of transportation or 

communication in interstate commerce or by use of the mails, engaged in transactions, 

practices, or courses of business which operated or would operate as a fraud or deceit 

upon the purchasers.  

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33. By reason of the foregoing, Michel directly or indirectly, violated and 

unless enjoined will continue to violate, Section 17(a)(3) of the Securities Act [15 

U.S.C. § 77q(a)(3)]. 

PRAYER FOR RELIEF 

WHEREFORE, the Commission respectfully requests that the Court: 

I.  

Issue findings of fact and conclusions of law that Defendant violated Section 

17(a)(3) of the Securities Act [15 U.S.C. § 77q(a)(3)]. 

II.  

Issue a judgment permanently restraining and enjoining Defendant and her 

agents, servants, employees, and attorneys, and those persons in active concert or 

participation with any of them, who receive actual notice of the judgment by personal 

service or otherwise, from directly or indirectly violating Section 17(a)(3) of the 

Securities Act [15 U.S.C. § 77q(a)(3)]. 

III.  

Issue a judgment permanently restraining and enjoining Defendant from 

participating in any offering of municipal securities, including engaging in activities 

with a broker, dealer, or issuer for purposes of issuing, trading, or inducing or 

attempting to induce the purchase or sale of any municipal security; provided 

however, that such injunction shall not prevent Defendant from purchasing or selling 

municipal securities for her own personal accounts. 

IV.  

Order Defendant to pay civil penalties pursuant to Section 20(d) of the 

Securities Act [15 U.S.C. § 78t(d)]. 

V.  

Retain jurisdiction of this action in accordance with the principles of equity and 

the Federal Rules of Civil Procedure in order to implement and carry out the terms of 

all orders and decrees that may be entered, or to entertain any suitable application or 

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motion for additional relief within the jurisdiction of this Court. 

VI. 

Grant such other relief as this Court may deem just and appropriate. 

Dated:  September 16, 2021 Respectfully Submitted, 

/s/ Jessica A. Adams          

Jessica A. Adams 

Attorney for Plaintiff 

SECURITIES AND EXCHANGE 

COMMISSION

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