The agency responsible for checking the creditworthiness of municipalities when they want to apply for multi-million-dollar loans (municipal bonds) is Moody’s–full name, Moody’s Investors Services. Recently, the company downgraded their rating for the Town of Ramapo due to fiscal stress. Now, with the arrests of the Town Supervisor and Aaron Troodler for securities fraud, Moody’s has decided to take a second look at Ramapo books since they are the focus of 22 federal charges.
In a press release issued one day after the arrests, the ratings company announced: “Moody’s Places Ramapo, NY’s A1 GO Rating Under Review for Downgrade.” The rating will affect approximately $146 million in outstanding debt for the town.
The reasons given for the immediate review are obvious. “The review for downgrade reflects uncertainty around federal fraud charges brought by the US Justice Department and the SEC against a former assistant Town Attorney and former Executive Director of the Ramapo Local Development Corporation (Troodler) and the town Supervisor (St. Lawrence). The charge includes the allegation that town officials misled investors regarding Ramapo’s financial position. The ramifications of these allegations with respect to the town’s recent financial reporting and current position are unknown, but could be significant if Ramapo’s as-reported situation has been materially over-stated.”
For a clearer picture of what concerns Moody’s, here is a paragraph from the indictment handed down by the grand jury against St. Lawrence and Troodler:
“From in or about November 2009 to the present, Christopher St. Lawrence and N. Aaron Troodler, the defendants, together with others known and unknown have engaged in a scheme to defraud investors in all bonds issued by the Town and by the RLDC that were outstanding during that period. The defendants and others made materially false and misleading statements and omitted material facts regarding the finances of the Town and the RLDC, as set forth below. They did so primarily to inflate the balance of the General Fund, partly to conceal both the extent to which the Town financed the stadium project and the impact of that financing, and to conceal the RLDC’s illiquidity. As a result of the scheme, investors in all Town and RLDC bonds outstanding during the relevant time period have, to date, suffered millions of dollars in losses.”
The federal investigation was found believable by a grand jury, and there are additional separate charges presented in a 40-page Securities and Exchange Commission complaint, which adds Michael Klein and Nathan Oberman to the list of those charged. That complaint also demands a jury trial. So there is no way that Moody’s could allow the Ramapo current rating to remain without a re-examination.
So what happens if Moody’s downgrades Ramapo’s rating even further? Well, as new bonds become riskier as investments, the interest rates climb and the taxpayers pay more to get loans to repay old loans. With $146 million in outstanding debt now combined with near zero credibility will St. Lawrence’s failed fiscal plan of refinancing old debt with new short-term debt finally collapse in on itself?
In the SEC complaint, the federal agency has requested the court do the following:
” Permanently enjoining St. Lawrence, Troodler, Klein, and Oberman from participating in an 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.”
It looks like the shell game is over.