Regulator: ‘Catastrophic’ failure of NMFA controls

October 12, 2012 • State News

SANTA FE, N.M. (AP) — The state’s top securities regulator said Thursday a fake audit at the New Mexico Finance Authority went undetected for months and was distributed to investors because of a complete breakdown of the agency’s management and oversight.

Securities Division Director Daniel Tanaka told a legislative committee Thursday the release of the audit with misleading financial information was a “catastrophic systemic failure in the controls surrounding the audit progress.”

NMFA ex-controller Greg Campbell has been indicted for securities fraud and forgery, but a legislator complained that no top executives are facing criminal charges. A grand jury declined to indict the authority’s chief operating officer.

“I think the brother has taken the hit for everyone above him and I think that is so unfair,” said Rep. Sheryl Williams Stapleton, D-Albuquerque.

Campbell and Stapleton are African [auth] American.

She described Campbell as the “fall guy” and said others should lose their jobs or be charged. As controller, Campbell was responsible for accounting operations at the authority. He was supervised by the chief operating officer.

Regulation and Licensing Superintendent J. Dee Dennis Jr. said, “Poor management and criminal conduct are two different things.”

Tanaka said no other charges are expected because his investigation found no evidence that anyone other than Campbell knew the audit was forged before it was distributed to investors. It’s a violation of securities law to misrepresent the authority’s financial balances, he said.

Campbell has told securities investigators he had forged the audit, Tanaka said, but there’s no evidence that money is missing. He said Campbell’s motives remain unclear but he said the audit was needed as part of financial and legal materials for a $24 million bond issue in March.

Chief Operating Officer John Duff, who is on leave without pay, had been arrested by regulators as an accessory to securities fraud and conspiring to engage in a pattern of racketeering. Tanaka defended the decision to arrest Duff and said he couldn’t speculate on why the grand jury didn’t indict the executive. Regulators contend that Duff agreed to a misleading accounting change of agency revenues, which was suggested by Campbell.

However, several legislators said the revenues in question were not used to back the authority’s bonds and potentially weren’t important for investors.

Tanaka disagreed, saying “accounting standards and the law take a very different view.”

He said top management, the authority’s outside auditor and its governing board should have spotted the false audit, which wasn’t detected until July after questions were raised why the audit was late in being submitted to the state auditor’s office. The audit was due in December.

Tanaka said any manager making a thorough review of the forged audit could have easily determined it was a fake.

“Senior management created an atmosphere which allowed fraudulent activity to flourish,” said Tanaka. “The internal controls upon which investors and taxpayers depend completely failed. And although it doesn’t appear that they looted the NMFA, they did steal the trust that New Mexicans had in its integrity.”

An outside accounting firm had been hired to prepare the authority’s audit and was at least two-thirds done. Tanaka said the auditing firm had a responsibility to disclose when a state agency delays in providing needed information for its work.

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