Markets Wired

On March 28, 2019, the Securities and Exchange Commission charged the former controller of a New York-based not-for-profit college with defrauding municipal securities investors by fraudulently concealing the college’s deteriorating finances.

According to the SEC’s complaint, in recent years, the College of New Rochelle came under considerable financial stress because of declining student enrollment and plummeting revenue from tuition. To hide the college’s deteriorating financial condition from investors, the college’s former controller, Keith Borge, created false financial records, didn’t file payroll tax submissions, and didn’t assess the collectability of pledged donations that were increasingly unlikely to be received as donors became more frustrated with the college’s operations. Borge’s misconduct resulted in the college’s financial statements for its 2015 fiscal year falsely overstating net assets by almost $34 million. Borge also falsely certified the accuracy of the college’s financial statements. The financial statements were published by Borge to an online repository in connection with the College’s continuing disclosure obligations stemming from a 1999 bond issuance, and significantly influenced investors’ decisions to invest in the bonds.

The SEC’s complaint, filed in federal district court in Manhattan, charges Borge with violating, and aiding and abetting violations of, the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Borge agreed to a partial settlement that would permanently enjoin him from future misconduct, with potential monetary sanctions to be determined at a later date. The partial settlement is subject to court approval.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Borge. Borge has pleaded guilty to those charges.

The SEC did not charge the College of New Rochelle after considering the institution’s extensive cooperation and remediation. After discovering Borge’s actions and conducting a preliminary review, the college publicly reported the financial issues, promptly engaged outside expertise to conduct a full internal investigation, and issued restated financial results. The college also promptly and extensively cooperated with the SEC in its investigation and proactively undertook wide-reaching remedial measures to enhance its internal controls and governance.

The SEC’s investigation, which is continuing, has been conducted by Jon Daniels and Wendy Tepperman of the New York Regional Office and Creighton Papier of the Public Finance Abuse Unit. The SEC’s litigation will be led by Todd Brody and Mr. Daniels. The case is being supervised by Lara S. Mehraban, Mark R. Zehner, and Ms. Gaunt. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the U.S. Internal Revenue Service, and the U.S. Postal Inspection Service.