Accounting Goof or Crime at NMFA?
State securities agents were waiting for John Duff, chief operating officer of the New Mexico Finance Authority, when he arrived at work Wednesday morning in downtown Santa Fe.
The agents arrested Duff, paraded him outside in front of a TV news crew, slapped handcuffs on him and put him in the back seat of a Ford Crown Vic.
Duff, 70, a tall man with white hair, was taken to the Santa Fe County jail, where he was forced to trade his gray suit for red jail garb and marched in front of a camera for mug shots.
State Securities Director Daniel Tanaka said Duff had conspired with former Finance Authority Controller Greg Campbell to cook the books at the agency, and Tanaka compared them to corporate fraudsters. Great sound bites. By the way, there was no perp walk for Campbell, who has admitted forging a 2011 audit of the Finance Authority. Maybe there wasn’t another news crew available. Campbell was simply told to go to the Securities Division office in Santa Fe, where he also was arrested Wednesday.
The charges against Duff are impressive: eight counts of fraudulent sale or offer to sell a security, racketeering, conspiracy to commit racketeering and nine counts of accessory. He could spend the rest of his life in prison.
There are no allegations that Duff conspired with Campbell to fake the 2011 audit, although Duff has taken responsibility for it
because he supervised Campbell and didn’t catch the forgery.
So what exactly is Duff accused of doing?
He allegedly misled investors and potential investors in Finance Authority bonds by agreeing with an accounting change recommended by Campbell.
Under the change, $39.6 million transferred by the authority to the state over two years to help ease a budget crunch was accounted for as expenses rather than as decreases in revenues.
Campbell explained the accounting change to the board of the Finance Authority at a public meeting in August 2011, and the board approved authority financial statements that reflected the change.
Craig Reeves, president of the First National Bank of New Mexico in Clayton and a former board member of the Finance Authority, told me there were several agency discussions about how to account for the money transferred to the state.
Maybe accounting for the money as expenses was a mistake by Duff and others at the Finance Authority. But did the mistake rise to the level of a crime worthy of the treatment of Duff and the charges against him? Did the Securities Division overreach in headline grabbing?
The board of the Finance Authority on Thursday placed Duff, whose annual salary is $149,350, on leave without pay because of his arrest. The board also placed the authority’s chief executive officer, Rick May, on indefinite administrative leave with pay, citing a lack of confidence. May, whose yearly pay is $150,000, isn’t accused of a crime or knowledge of one.
The investigation of the Finance Authority began last month with the discovery that its 2011 audit had been forged and presented to investors and potential investors in authority bonds.
Campbell has said he forged the 2011 audit because a real one hadn’t been completed in time for an April 2012 bond sale. It’s also possible Campbell didn’t want outside auditors snooping around. So far, there are no accusations of missing money.
The Finance Authority is a quasi-governmental agency whose primary mission is to finance roads, sewers and other infrastructure projects for state and local governments and agencies.
The authority gets most of its revenues from an earmarked portion of the state gross receipts tax, interest and loan administrative fees. Its budget, about $128 million a year, isn’t approved by the Legislature.
In investigating the phony audit, securities agents latched onto how the Finance Authority had accounted for the $39.6 million transferred to the state in two transactions in the 2010 and 2011 fiscal years.
Initially, the first transfer was treated as a decrease in revenue and disclosed as such in the authority’s 2010 financial statements and audit. But Campbell decided in 2011 to show the transfers instead as grant expenses on financial statements.
Campbell allegedly told investigators he knew the money should be accounted for as decreases in revenue but was concerned about how that looked. That is the investor fraud alleged by the state.
Campbell said he proposed to Duff that the transfers be accounted for as grant expenses and that Duff agreed, according to arrest affidavits. Duff is an experienced finance executive and former partner in a major accounting firm.
A few months later, Campbell presented financial statements to the authority board that classified the transfers as expenses. He also told the board he had decided to show the money as expenses rather than decreases in revenue. The board approved the financial statements.
Maybe Duff and the board believed that if Campbell was wrong in accounting for the transfers as grant expenses, the auditors would say so and the financial statements would be corrected.
On the same day that the board approved the financial statements with the accounting change, Duff signed a contract for an independent audit of the agency. Campbell never submitted the contract to the state Auditor’s Office for approval, and the audit hasn’t been conducted. That’s the audit Campbell admitted forging.
Securities agents said in the arrest affidavits that they recently asked Duff how money reverted to the state should be accounted for and Duff said a reversion should be accounted for as a decrease in revenue if the funds are returned in the same year they were received. The money transferred by the Finance Authority to the state was received in prior years.
The arrest affidavits say that, under Governmental Account Standards Board Statement 34, the transfers should have been treated “as either a non-operating expense or a special/extraordinary item, rather than as an operating expense, specifically grant expenses.”
That sounds like a complicated case to make to a jury, if the charges against Duff make it that far.