Auditor General Office: State can withhold funds from Collier for Brock investment policy violations

By Gina Edwards

Naples City Desk

A senior auditor with the Florida Auditor General’s Office said the state has the ability to withhold all state funds from a county government in response to investment policy violations, including for violations like those acknowledged by Collier Clerk of Courts Dwight Brock in his handling of Collier County’s $600 million portfolio.

In late November, Brock switched custody of the county’s portfolio without a vote of Collier County Commissioners, in violation of the county’s investment policy, a county contract and without the knowledge of the county manager and county attorney, as first reported by Naples City Desk on WatchdogCity.com.

After the violation, on December 9, Commissioners voted 4 to 1 to change the county’s investment policy — after the fact — and strip out a requirement that Brock get elected commissioners’ approval to move the county’s cash and securities portfolio to a new custodian.

The moves come following allegations by Commissioner Georgia Hiller that Brock illegally steered the county’s lucrative banking services contract to the bank co-founded by Florida Sen. Garrett Richter, First Florida Integrity Bank.  Hiller contends Richter’s bank should have been removed from consideration because it didn’t submit a qualified bid and failed to offer a qualified custodian to hold the county’s securities in line with the county’s investment policy. Hiller also said Richter was allowed to lower his bid after the fact.  

The investment policy violations could be examined by the Auditor General’s Office depending on the stance of the county’s external auditor, Clifton Larson Allen, which is tasked with determining if violations are serious.

A county contract that placed custody of the county’s securities with the original custodian selected by Richter’s First Florida Integrity Bank, Infinex Financial Group, has not been amended. Brock and Richter signed an agreement, without commissioners’ vote, switching custody of the county’s $500 million in securities to Louisianna-based First National Bankers Bankshares.

If external auditors find that an investment policy violation occurred, then the state’s Auditor General can conduct an audit of the local entity and/or refer the issue to the Legislative Auditing Committee, which has subpoena powers as a standing committee of the Florida Legislature.

The 10-member Legislative Audit Committee can then direct the Florida Department of Revenue and the Florida Department of Financial Services to withhold all state money from a county government.

“The biggest thing they can do is withhold state money,” said Marilyn Rossetti, audit manager for the Florida Auditor General’s Office. “They can hang on to those funds until the local government complies.” 

A former federal regulator with the Securities and Exchange Commission, attorney James Sallah, said investment policy violations are significant.  “It’s a very big deal,” Sallah said. “In (a local government’s) handling of money it’s all about internal controls.”

“If they never voted to approve a new custody agreement, how are they able to do this?” he said, adding that it’s troubling for two public officials to take such action. “Did they have the authority to do this unilaterally without a vote?”  

Sallah, who has conducted investigations related to local governments handling of investments, said someone is making a lot of money related to custody of the cash and securities portfolio and the county should want a full and fair bidding process. He questioned whether it was inappropriate for Collier County Commissioners to change the investment policy after the fact.

“There are red flags all over the place here,” he said.

“Broadly speaking if someone violates an investment policy and doesn’t disclose it, it could rise to the level of fraud,” Sallah said.  In addition, he said poor internal controls over cash and investments could draw scrutiny from credit rating agencies that pass judgment on the safety of county-issued debt to pay for projects like roads and storm water improvements.

Brock and Richter have denied wrong doing. Richter, a popular local lawmaker and high-profile local business leader, has said he didn’t use his public office to improperly obtain a financial benefit and that Florida has a citizen legislature and he's a banker. Brock did not respond to interview requests and email questions sent in recent weeks about whether he committed fraud or acted outside the scope of his authority in transferring the county’s securities to a new custodian without a contract amendment or Commission vote.

Richter acknowledged in an interview with Naples City Desk that the custodian submitted with FFIB’s bid, Infinex Financial Group, did not comply with the county’s investment policy. Richter told Naples City Desk that the county would not be charged any fees related to custody of the securities and that First Florida Integrity Bank would be covering any fees the county may owe to FNBB Capital.

Local government gadfly Michael Lissack filed a complaint with the Florida Attorney General’s Office and he was told that the Florida attorney general didn’t have jurisdiction and that any complaint should go to local prosecutors and law enforcement, to Gov. Rick Scott, or to the Florida Commission on Ethics. Lissack notified the media that he sent a complaint to the FBI alleging wire fraud and money laundering as part of a scheme in which he said Brock abused his public office “to get the money to Richter’s bank at all costs.”

Commissioner Georgia Hiller, formerly a Brock ally, first raised questions about the banking contract in early September, calling Brock’s handling of it illegal and corrupt. Brock, who hasn’t appeared publicly before Commissioners since then, dismissed Hiller’s allegations as political. Commission Chairman Tom Henning publicly blasted Hiller, and Henning defended the first custodian, Infinex Financial Group, based on a request from Brock’s office, emails obtained by Naples City Desk show.

Public records obtained by Naples City Desk show a disclosure in the Clerk’s account opening document with Infinex that asked the Clerk’s Office to acknowledge that it understood that bank employees, from Sen. Richter’s First Florida Integrity Bank, could receive a fee for their referral to Infinex.

Naples City Desk first broke the story that Brock had signed an agreement with the new portfolio custodian, First National Bankers Bankshares without a Commission vote in November following a public records request. Both County Manager Leo Ochs and County Attorney Jeff Klatzkow said in a public meeting that they didn’t know Brock had switched custody until Naples City Desk broke the story.

Joseph Quinlan, the chairman of First National Bankers Bankshares Inc., the parent of FNBB Capital which holds the county’s securities, said his organization received a complaint from Lissack. He said “We’ve not been able to ascertain any impropriety related to the custodial relationship we have with that entity.” When asked to clarify which entity, he said FNBB’s “custodial relationship is not necessarily with the Clerk” but “with the ownership of those securities.”   

When asked if he was aware that Collier County Commissioners had an existing contract which placed the securities with a different custodian, Quinlan responded: “According to the documents we have, whoever transferred those securities was empowered with authority to do so.”

He said required resolutions were in place and “We have done everything we possibly can to ensure there was nothing imporper.”

Documents obtained by Naples City Desk show Brock’s Office transferred the securities to FNBB Capital on Nov. 24, more than two weeks before Collier Commissioners voted to change their investment policy and give Brock authority to select a custodian without elected commissioners’ approval on Dec. 9.

The investment policy change, which was rushed through ahead of public advertising requirements related to a companion investment policy ordinance change, stripped out a requirement that commissioners vote to approve a custodian for the county’s securities.

The change, first reported by Naples City Desk, was not detailed or disclosed on the executive summary provided to County Commissioners for their vote on the Dec. 9 meeting.

The change — switching approval power from elected Commissioners to Brock — might have gone undetected if a strike-through version was not provided to commissioners and the public in commissioners' back-up material. The change also stripped out a requirement that the custodian bank have combined and surplus capital of a minimum of $100 million.

 Commissioner Hiller called out the investment policy switch and asked for a delay, but commissioners voted 4 to 1 to approve the new policy with minimal discussion.

Emails obtained in a public records request by Naples City Desk show that a consultant sent a redlined version of the new investment policy dated Nov. 24, the same day Brock’s Office transferred the securities, to Brock’s Finance Director Crystal Kinzel, Assistant Finance Director Derek Johnssen and County Manager Finance Director Mark Isaackson on Dec. 1 with “changes as discussed.”

More Potential Violations

Public records obtained by Naples City Desk suggest other potential investment policy violations by Brock’s office and raise questions that Brock has not answered.

Brock has acknowledged that the 76-year-old Arizona-based money manager employed by his office in charge of the county’s $600 million portfolio hasn’t had a performance evaluation since 2007. The money manager, John Kannengieser, showed no continuing education in his personnel file for 10 years, as first reported by Naples City Desk in October.

Continuing education is required by state law, Florida Statute 218.415, annually for the Clerk and for managers making decisions about county investments, and the requirement is incorporated into the county’s investment policy. The county’s external auditors are required by state law to report to the auditor general if the county is incompliance with Florida Statute 218.415 with regards to its handling of the county’s investments.

Failing to meet the continuing education requirements mandated by state law are the most frequent law violations that trigger action by the Legislative Auditing Committee, state auditor Rosetti said. However, she said violations are still rare.

Brock declined to respond to written questions about the continuing education requirements for the Arizona-based employee, John Kannengieser, who oversees the county’s portfolio for Brock, which Naples City Desk posed to Brock in writing in October.

According to the county’s investment policy and state law: “Each individual responsible for making investment decisions including the Chief Financial Officer, shall annually complete eight hours of continuing education in subjects or courses of study related to investment practices and products. Evidence of such education will be maintained by each individual and available for inspection.”

Brock’s spokesman acknowledged receiving the email but did not respond to written questions included in a public records request on Dec. 17 from Naples City Desk to inspect documents showing evidence of compliance with the continuing education requirements in state law and the county’s investment policy. Naples City Desk asked to inspect annual continuing education evidence required by the investment policy for the past five years.

In neighboring Lee County, a request to cash and investments manager Sean Congero for evidence of his most recent annual continuing education was provided to Naples City Desk within a few hours. Congero provided a certificate from the Florida Local Government Investment Trust showing he had completed 10 hours of classes with titles like “Investment Policies, Practices and Results: Financial Operations of the City of Atlanta” and “Custodian Bank – Behind the Scenes” and “Elected Officials & Public Sector Investing, Best Practices.”  

Required background check

Emails obtained by Naples City Desk from Brock through a public records request suggest that Brock’s Office may have violated the county’s investment policy by failing to do a background check on Infinex Financial Group Inc., prior to the broker-dealer’s selection by Brock as part of the county’s lucrative banking services contract.

No background check documents were produced but an email showed Brock’s Assistant Finance Director Derek Johnssen asked a staff accountant if he had seen a background check from the Financial Industry Regulatory Authority in October, almost a month after Infinex was approved as custodian.

A background check obtained by Naples City Desk from the Financial Industry Regulatory Authority showed that Infinex was cited by federal regulators for failing to keep adequate records related to order tickets for municipal and corporate bonds and for failing to establish compliance procedures for required record-keeping. Regulators also cited the firm for conducting business in Illinois without a license, failing to register branch offices in Connecticut and for submitting false insurance applications in New York. In 2014, regulators censured the firm for brokers failing to conduct due diligence on exchange traded funds. Infinex provided customer restitution of $287,000 and paid a fine of $75,000 without admitting wrongdoing.    

Commissioner Georgia Hiller earlier in September questioned whether Brock’s staff had conducted required background checks.

Brock and his community outreach director did not respond to emailed questions about the background check and whether failing to conduct one violated the county’s investment policy.

A public official is not required by law to answer questions from a member of the public or press. But any member of the public has a constitutional right to obtain information about government actions and documents by requesting public records via Florida’s public records law. The public records law serves as citizens’ check on power to ensure government actions are open and not secret.   

Naples City Desk made a broad public records request of Brock’s office for emails containing the word Infinex.

Naples City Desk has been at odds with Brock’s office over public records requests since February. Naples City Desk received a favorable court ruling in a lawsuit filed against Brock challenging high public records fees that he assessed for county government records after Naples City Desk published critical stories about his audit of a former political challenger.

Brock has appealed the court ruling in favor of Naples City Desk by Collier Circuit Judge Fred Hardt, and since that time Brock has threatened to retroactively charge Naples City Desk the higher public records rate if he is successful on the appeal.

For example, in response to an October public records request for emails related to portfolio custodian Infinex Financial Group, Brock’s Office sent an email saying the Clerk is not requiring payment of fees but reserves the right to charge Naples City Desk $1,537 for 1,537 pages for electronic records “once the issue has been clarified by the Courts.”

Judge Hardt ruled after a trial in June — forced by Brock at taxpayers’ expense after he received an initial unfavorable court decision — that Brock could charge $1, the cost of a CD, for electronic records or the actual cost of duplication. Brock contends he is not required to provide county government documents at fees proscribed by the public records law. Instead, he says he is allowed to charge $1 a page for any document in his possession, not just court records, for $1 a page.  Naples City Desk has asked Brock’s Office to provide fee estimates in advance of fulfilling public records requests and disagrees with Brock’s assertion that he can charge retroactively if he wins his court appeal.    

The portfolio

As of Sept. 30, Brock’s Office reported the county had securities of $550 million plus cash of $40 million on hand at Fifth Third, the prior custodian for $590 million.

In response to a public records request, Brock’s Office provided a Nov. 24 verification statement to Naples City Desk showing the county had $500 million in securities that were transferred to the new custodian, Alabama-based FNBB Capital LLC, a subsidiary of First National Bankers Bankshares of Louisiana. 

FNBB Capital LLC initially put “not available” for market values on $245 million in securities held by the Collier County. A key duty of a portfolio custodian is to serve as an independent set of eyes on investments to reports the value of the securities held in the portfolio.

After additional communication from Brock’s Office, a subsequent email was sent by FNBB Capital LLC on Nov. 24 saying it was providing an update that included “missing market prices” and with total securities valued at $500.4 million on the verification statement.

FNBB Chairman and president Quinlan said in an interview that it’s not uncommon for the bank not to be able to provide market prices without additional research.

“There may not be an active market that we can readily identify,” Quinlan said, speaking in general, saying he hadn’t personally reviewed the Collier County holdings referenced.  

Lee County investment manager Congero, an employee of the Lee County Clerk, said Lee County has never had a custodian fail to readily provide a market price for securities in the 8 years he’s been there. “Liquidity is my first concern when you’re not getting market prices,” he said.  

Liquidity is the term used to describe how easy or hard it is to sell an investment. An investment that is illiquid is one that is difficult to sell because there may not be much of a market, or a pool of willing buyers. Illiquid investments are considered higher risk.

Brock reports on his web site that the county had $525 million in securities and $138 million in deposits in First Florida Integrity Bank as of Nov. 30, 2014 for a total of $663 million.  

Reporting by: Gina Edwards

Dateline: Naples, Fla., Dec. 31, 2014

Contact Gina Edwards at 239-514-1336 or by email at ginavossedwards@gmail.com