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STATE OF NEW MEXICO OF COUNTY OF SANTA FE IN THE DISTRICT COURT
STATE OF NEW MEXICO
NEW MEXICO FINANCE AUTHORITY
207 SHELBY STREET SANTA FE, NEW MEXICO 87501
AFFIDAVIT FOR SEARCH WARRANT
I, Benjamin Baker, being duly sworn, upon my oath, state that I have reason to believe that on the following described premises; The premises to be searched is a COMMERCIAL OFFICE BUILDING located at 207 Shelby Street in Santa Fe, NM 87501. The building is a three story structure with a flat roof and a white and brown stucco facade. A hanging sign affixed to the western wall above the main entrance prominently displays the street address “207 Shelby Street” and the label “New Mexico Finance Authority” (NMFA). The primary entrance faces west towards a small designated NMFA parking area on Shelby Street and is recessed under and enclosed by a second floor balcony with a dark brown wooden railing and pillars. The premises are bordered to the South by a vacant office building with street number “219.” The premises are bordered to the Southeast by a commercial establishment called “Santa Fe Jewels” (214 Old Santa Fe Trail). to the East by a vacant dirt parking lot, and to the Northeast by another commercial establishment called Santa Fe East.” The premises are bordered to the North by a dirt parking area and the rear exit of the “Santa Fe East” building. This description should include the curtilage in the rear of the main building. This description should also contain any safes or secure storage fixtures inside the above described structure.
Afflant Background NM Securities Division Special Agent in Charge Benjamin Baker is a full-time, salaried law enforcement officer employed by the NM Securities Division (NM SEC). Regulation and Licensing Department. Under the supervision of Securities Division Director Daniel S. Tanaka, Special Agent Baker has been assigned as the lead case agent in this investigation. Special Agent Baker has been with the Division since 2011, and has served with the Albuquerque Police Department and the Carlsbad Police Department and has over fifteen years of combined local, and state, law enforcement experience. Special Agent Baker’s duties include detection and prevention of securities fraud, conducting criminal and administrative investigations, general white collar criminal investigations, and enforcement of the New Mexico Securities Act. While the affiant is the main case agent, he is working in a team environment with other members of the New Mexico
Securities Division, sworn and civilian, as well as members of the Office of the State Auditor utilizing a team police concept.
In the city of Santa Fe, State of New Mexico, County of Santa Fe, there is now being concealed the following items:
The items to be seized are described as New Mexico Finance Authority’s and closely associated subsidiaries’ General Ledger detail; any unaudited andlor internally prepared Financial Statements; Financial Statements for the year ended June 30, 2011; all internally prepared accounting schedules and documents supporting the financial statements for fiscal years 2011 and 2010; a listing of all Bonds issued by the NMFA or its subsidiaries between January 1, 2010 and the present, a listing of all outstanding Bonds, including issue date and maturity date of the same; a listing of all underwriters and underwriter staff members for all Bond portfolios; a listing of all journal entries from January 1, 2007 to present; a listing of all non-performing loans, their amounts, funding date, and borrower’s identifiers; a listing of all outstanding loans, their amounts, and their funding dates; records and statements of PPRF funds in the New Mexico GROW Local Government Investment Pool; records and statements of PPRF Funds held by other Trustees; e-mails of Board Members and NMFA Staff (contained in or on the Exchange Server database, .PST or .OST file storage and Mimecast Cloud Journal Archive); minutes, notes or other records of the 2009, 2010 and 2011 Exit Conference; all audio recordings, minutes and motions for all Board Meetings and Board Committee Meetings from January 1, 2009 to present; a list of all employees and job descriptions; personnel files of all NMFA employees; any information or reports submitted by the NMFA to EMMA (electronic municipal market access) from January 1, 2010 to present; any information or reports submitted by the NMFA to the Municipal Securities Rulemaking Board (MSRB); any documents and records which are used and maintained by the NMFA and others for past, present, and future dealing in securities, investments and/or investor funds; business related records, financial records, accounting records, bank records, powers of attorney, titles, bank account information, any checks, credit card account information, electronic mail (contained in or on the Exchange Server database, .PST or .OST file storage and Mimecast Cloud Journal Archive), and correspondence; personal and business computers and accessories, that will contain the same types of records previously described, including but not limited to: computers, hard drives, removable storage media, diskettes, CD’s, software, printers, thumb drives, servers (including virtual servers and accounting software). and flash drives; any and all items related to the sale of securities, financial reporting and disbursement of loan interest payments and interest payments for any securities made thereon.
The facts tending to establish the foregoing grounds for issuance of a Search Warrant are as follows:
On July 13, 2012, the State of New Mexico Securities Division learned of the existence of a fraudulent audit report which had previously been released to investors, the public, and other entities by the New Mexico Finance Authority (NMFA). The Securities Division Director, agents under my supervision, and I immediately began to investigate the allegations surrounding the filing of the fraudulent audit. From NMFA’s own
publicly available literature, I learned the following: The New Mexico Finance Authority was created as a governmental instrumentality in 1992 to coordinate and facilitate the planning and financing of state and local capital projects in New Mexico. NMFA is able to utilize financing mechanisms to leverage and maximize the State’s capital investments in state and local projects. NMFA partners with local government entities, state agencies, legislators, repeat borrowers and financial advisors to carry out their mission while at the same time sustaining the capacity of the various loan programs NMFA administers. Additionally, I have had previous dealings with the NMFA and its staff and became familiar with the organization due to another unrelated investigation. Senior management of the NMFA reports to a Board. The Board consists of ten members and a Chair. The Board has six committees which assist the decision making process of the entity. These committees include the Audit Committee, Executive Committee, Economic Development Committee, Finance/Loan Committee, Investment Committee and Contracts Committee. Senior Management includes Richard May, Chief Executive Officer, John Duff, Chief Operating Officer, Rey Romero, General Counsel, Michael Zavelle, Chief Financial Strategist, and Dora C De Baca, Chief Administrative Officer. Board and Committee meetings are subject to the provisions of the Open Meetings Act. The Open Meetings Act requires that the minutes and audio recordings of the meetings be maintained. Under the authority of the New Mexico Finance Authority Act Chapter 6 article 21, one of the financing mechanisms utilized by the NMFA to raise capital involves the issuance of municipal bonds for sale to investors. From my training and experience as a securities fraud investigator, I know that a bond is a type of debt security which pays interest to the bond holder over a period of time. Purchasing a bond from the issuer of that bond is in essence a loan to the issuer for a period of time at a defined rate of interest. When the bond matures at the end of its term the principal amount is repaid to the owner of the bond. Municipal bonds are ways for governments below the federal level to raise capital for governmental purposes. The New Mexico Uniform Act. 58-13C-102 (DD) NMSA 1978, states, “A “Security” means a note; stock; treasury stock; securityfuture; bond; debenture; evidence of indebtedness; certificate of interest or participation in a profit-sharing agreement; collateral trust certficate; preorganization certficate or subscription; transferable share; investment contract; voting trust certificate; certficate of depositfor a security; fractional tin divided interest in oil, gas or other mineral rights; put, call, straddle, option or privilege on a security, certficate of deposit or group or index ofsecurities, including an interest therein or based on the value thereof; put, call, straddle, option or privilege entered into on a national securities exchange relating toforeigit currency; or, in general, an interest or instrument commonly knowim as a “security”; or a certificate of interest or participation in, temporary or interim certjficate for, receipt for, guarantee of or warrant or right to subscribe to or purchase any of the foregoing.” As a “bond” is statutorily defined as a security, fraud in connection with the sale of a bond would fall within the jurisdiction of the Securities Division.
I have visited the offices of the NMFA located at 207 Shelby Street, Santa Fe, NM 87501 numerous times. Most recently, I visited NMFA’s office on July 20, 2012. 1 observed that business was being conducted there at the time of this visit. I observed computers, files and staff members working in the office on all floors. It is their oniy place of business and the primary workplace and file storage location. Furthermore, on July 24, 2012, Director Tanaka spoke with the NMFA’s Chief Administrative Officer. Dora C de Baca. C de Baca stated to Director Tanaka that the NMFA does have two offsite storage units utilized for storing furnishings and files but that the files there are “very old” and are not in current use. Subsequently, C de Baca provided Director Tanaka with a document which detailed the files in storage offsite. Director Tanaka reviewed the contents listed in the 64 page inventory and they showed that the files stored offsite were primarily created before 2010. On Friday, July 13, 2012, the internet was utilized to access the NMFA website, www.nmfa.net, so as to download and review the Financial Statements of the NMFA, which had been issued for the fiscal years ending June 30, 2011 and 2010. Examination and analysis of the NMFA financials was conducted by Anne Layne, CPA, CFE, Forensic Analyst for the State of New Mexico Securities Division, who reports to the Affiant. Layne has a Bachelor’s degree in Accounting and a Masters of Business Administration. Layne has eight years of relevant experience, including experience as a staff auditor and senior auditor for governmental entities, non-profit entities, and financial institutions. Previous to her accounting work, Layne worked in banking for two years. Layne reported the following: The financial statements include an independent auditor’s report, management’s discussion and analysis, a statement of net assets, a statement of revenues, expenses and changes in net assets, a statement of cash flows, notes to the financial statements, supplementary schedules and reports and schedules required by 0MB Circular A-133 in relation to audits of recipients of federal funds. The financial statements are compiled by management of the NMFA, and are audited by an independent auditor, who authors and provides an opinion in the independent auditor’s report. Financial statements for the NMFA are required to be prepared in accordance with generally accepted accounting principles as issued by the Governmental Accounting Standards Board in the United States. Layne conducted the review of the financial statements. Layne stated to me that she had determined that the June 30, 2011 financial statements included misstated figures and did not include proper disclosures. The documents examined included an audit report which claimed to be issued by Clifton Gunderson LLP (since merged to become CliftonLarsonAllen LLP). On or about July 18, 2012, Analyst Layne used the internet to access the NMFA website, www.nrnfa.net, so as to view publicly disseminated NMFA Board Meeting Minutes. Layne searched the website using the embedded search function for “minutes”. The results included the minutes for the Board meeting held on March 22, 2012 at 9:10 am in State Capitol Room 322. In the minutes, specifically item 31 of the agenda, labeled “Audit Committee Lonnie Marquez, Chair”, Richard May (Chief Executive Officer of the NMFA) reported “the State Auditor has approved the NMFA audit with zero findings.” According to my review of the New Mexico State Audit Act, and confinned by Shawna Maestas, investigator with the State Auditor’s office, the State Auditor must
receive the completed audit from the independent auditor. The State Auditor’s Office will then perform a review of the completed audit. Once this review is performed and the Auditor’s Office determines the audit is accurate in all material respects, the Auditor’s Office will issue a release letter to the entity under audit. The release letter gives the entity under audit permission to release the completed audit to the public. The State Auditor’s Office did not receive or approve audited financial statements from the NMFA for the fiscal year 2011 audit. Nor did the State Auditor’s Office issue a release letter to the NMFA. On July 16, 2012, 1 and agents of the State of New Mexico Securities Division met with J. Michael Stephens, Audit Partner with CliftonLarsonAllen LLP. According to J. Michael Stephens, CliftonLarsonAllen LLP (at the time Clifton Gunderson LLP) had been previously contracted to perform audits for the NMFA for fiscal years 2009, 2010, and 2011. J. Michael Stephens stated that CliftonLarsonAllen LLP had not issued an independent auditor’s report or audited financial statements for the NMFA for fiscal year 2011. I asked J. Michael Stephens and Shawna Maestas about the lengthy procedure in place to procure and complete the financial statement audit. The entity under audit is required to submit an auditor recommendation for the fiscal year audit to the State Auditor. Once the recommendation is approved by the State Auditor, the entity and the audit firm are required to complete a State of New Mexico Audit Contract, which is signed by appropriate entity personnel, the State Auditor’s Office and a representative of the audit firm. The entity is also required to sign an engagement letter with the audit firm prior to the beginning of audit work. An engagement letter is a written statement of the services to be provided by an audit firm to their client. After the audit is completed, management of the entity meets with the audit firm to discuss the financial statements. This meeting is called an “exit conference’. Additionally, before the audit is complete, management of the entity under audit is required to sign a representation letter. Shawna Maestas told me that the State Auditor’s office did not receive an audit recommendation from the NMFA for the 2011 fiscal year. Additionally, the State Auditor’s office did not receive a State of New Mexico Audit Contract from the NMFA. The State Auditor’s office provided me with an engagement letter for Clifton Gunderson (now CliftonLarsonAllen LLP) dated May 9. 2011, which was signed by John Duff on August 9, 2011. On the engagement letter, John Duff s title is listed as Chief Financial Officer. Per J. Michael Stephens, a representation letter for fiscal year 2011 was not completed as audit work for that year was never complete. According to J. Michael Stephens, auditing staff at CliftonLarsnAllen LLP reviewed the financial statements provided to them by the NMFA for the fiscal year ending June 30, 2011, dated December 10, 2011, and determined it contained material errors. The financial statements contained a note that an exit conference was held on December 10, 2011. According to Layne an exit conference is a meeting where the auditor presents the audit results and financial statements to the entity under audit. Such conferences are usually initiated and scheduled by the independent auditor. This note indicated that J.
Michael Stephens was present at the exit conference. Stephens was not aware of an exit conference and had not attended an exit conference for the NMFA. CliftonLarsonAllen LLP began audit procedures for the fiscal year ending June 30, 2011 in August 2011 however, were unable to complete the audit due to the NMFA’s failure to produce required documents. I also learned from meetings with Agents of the New Mexico State Auditor’s Office that the NMFA was delinquent in submission of audits for fiscal years 2011, 2010 and 2009, in violation of New Mexico State Audit Act. A review was conducted of the NMFA Board’s meeting minutes for the Board Meeting held on March 22, 2012. Statements made by parties present were summarized in the minutes. The statements made by the NMFA’s Chief Executive Officer, Richard May, during the March 22, 2012 Board Meeting directly contradict information provided by the State Auditor’s office and the Independent Auditor hired by the NMFA. In particular, on page 22, item 3 1 states in part, “Mr. May reported the State Auditor has approved the NMFA audit with zero findings.” According to the State Auditor’s Office and J. Michael Stephens, no audit was ever completed let alone approved by the State Auditor. On July 19, 2012, Daniel Opperman, Assistant General Counsel to the NMFA voluntarily provided me with several email communications between members of the NMFA staff, members of NMFA Senior Management, and CliftonLarsonAllen regarding the completion of the 2011 audit. In an email addressed to John Duff and Greg Campbell dated Friday, September 23, 2011 authored by Mandy Heagy, Senior Manager at CliftonLarsonAllen, Heagy states, “We are trying to schedule accordingly and obtain a reasonable idea on when we will be able to wrap up this audit. We have not received correspondence from anyone for several weeks and are concerned about the deadline of September 30, 2011. After last year’s missed date, the Audit Committee requested that we communicate with the (sic) ahead of time if the deadline was going to be missed. At this point, we think we need to contact someone and inform them of the status. Before doing that, we would like to set up a conference call with you to discuss the status and plans to complete the audit. Mike and I are available at your convenience. Please let us know if you are available.” Based on this email and other emails reviewed, I believe the email accounts of NMFA staff may contain information regarding the completion of the 2011 audit. On July 24, 2012 1 accessed an online computer based system known as “Electronic Municipal Market Access” (EMMA). Based on my training and experience as a securities fraud investigator, as well as the information posted on EMMA, I know that the EMMA system is operated by the Municipal Securities Rulemaking Board (MSRB). MSRB is a self-regulatory organization, which houses municipal bond disclosure documents that provide information to investors about municipal securities. EMMA also provides market transparency data, which includes real-time prices and yields at which bonds and notes are bought and sold, for most trades occurring on or after January 31, 2005. The information on EMMA is presented in a manner specifically tailored for retail, non-professional investors who may not be experts in financial or investing matters.
That same day. I searched the EMMA system and discovered that the NMFA sent the FY 2011 audit report to EMMA (Electronic Municipal Market Access) operated by the Municipal Securities Rulemaking Board as Attachment (A) as part of the Official Statement disclosures connected to the offering of $24,340,000.00 in Bonds entitled SENIOR LIEN PUBLIC PRO.JECT REVOLVING FUND REVENUE BONDS, SERIES 2012A. According to EMMA’s document archives, the Official Statement and information from the NMFA was posted to the EMMA website on April 3, 2012. New Mexico Securities Division Director Daniel S. Tanaka is the Administrator of the State of New Mexico Uniform Securities Act, and has extensive experience conducting and supervising major securities related and financial criminal investigations in New Mexico and New York. Director Tanaka has testified in the State of New Mexico as an expert witness in securities related matters. Additionally Director Tanaka has worked in the securities industry in the State of New York. Director Tanaka indicated that the Official Statement for this bond issuance is the functional equivalent of a prospectus delivered to potential investors. An Official Statement contains relevant information and disclosures that potential investors need to know when evaluating whether they wish to invest in the bond offering. As a result of the NMFA’s submission of the Official Statement related to the Bond offering entitled SENIOR LIEN PUBLIC PROJECT REVOLVING FUND REVENUE BONDS, SERIES 2012A, and including attachment (A) the fraudulent FY 2011 audit, they have effectively placed forged and false documentation directly into the hands of potential investors. I examined the official statement relating to this bond issuance submitted to EMMA by the NMFA and observed that page 1, paragraph 2, states, “The Finance Authority, established by the legislature of the State of New Mexico (the “State”) in 1992, is a governmental instrumentality separate and apart from the State created to coordinate the planning and financing of State and local public projects. For additional information concerning the Finance Authority, see “NEW MEXICO FINANCE AUTHORITY” and the Finance Authority’s financial statements for the fiscal year ended June 30, 2011 included as APPENDIX A hereto, which are the most recent audited financial statements available at this time. See “FINANCIAL STATEMENTS” herein.”
58-13C-501 NMSA 1978
It is unlawful for a person, in connection with the offer, sale or purchase of a security, directly or indirectly:
A. to employ a device, scheme or artifIce to defraud, B. to make an untrue statement of a material fact or to omit to state a material fact necessary in order to make the statement made, in the light of the circumstances pursuant to i:hich it is made, not misleading; or C. to engage in an act, practice or course of business that operates or would operate as a fraud or deceit upon another person.
On July 24, 2012, I contacted NMFA Information Technology employee John Holton, who provided me with screenshots from the archived SQL database for the NMFA website. According to the information contained in the SQL database, the NMFA Finance Authority 2011 Audit Financial Report was uploaded to the NMFA website on March 12, 2012 at 0814 hours. Investors and credit rating agencies may have relied on the fraudulent information to purchase Bonds that were part of this issuance. Investors are entitled to full disclosure of all material facts and information regarding investment products. The distribution of the false audit to investors represents a violation of the New Mexico Uniform Securities Act. The fraudulent audit report’s publication fraudulently characterized NMFA’s financial condition in violation of 58-13C-501B NMSA 1978. In March of 2012, the NMFA issued $24,340,000.00 in bonds, following the publication of the fraudulent audit report. The fraudulent audit report represents a material misrepresentation of fact presented publicly which was used by the investing public to make investment decisions about the aforementioned bond offering.
Based on all of the foregoing, I respectfully request a search warrant be issued for the above listed address.
Signat e o
TH ABOV NAMED COUNTY OF THE STATE DAYOF ,1,2O12
APPROVED BYPECJAL ASSISTANT DISTCT ATTORNEY DAY OF ON THE
FILED IN OPEN COURT THIS _LDAY
STATE OF NEW MEXICO COUNTY OF SANTA FE IN THE DISTRICT COURT
STATE OF NEW MEXICO -VS NEW MEXICO FINANCE AUTHORITY 207 SHELBY STREET SANTA FE, NM 87501
FER (STRICT JUDGE
THE STATE OF NEW MEXICO TO ANY OFFICER AUTHORIZED TO EXECUTE THIS WARRANT:
Proof by Affidavit for Search Warrant having been submitted to me, I am satisfied that the person named/described and/or property described in the Affidavit are located where alleged in the Affidavit, and I find that grounds exist for the issuance of the Search Warrant. YOU ARE HEREBY COMMANDED to search forthwith the person and/or place described in the affidavit, commencing between the hours of 6:00 a.m. and 10:00 p.m. and continuing thereafter until completed, for the person and/or property described in the Affidavit, serving this Warrant and making the search and if the person and/or property be found here, to seize the person and/or property and hold for safekeeping until further Order of the Court. You are further directed to prepare a written inventory of any person or property seized. You are further directed to file the return and written inventory with the Court promptly after execution of this Search Warrant.
2012 at )p -IOURS.
RETURN AND INVENTORY
I received the attached Search Warrant on 2012 and executed it on at o’clock (a.rn.) (p.m.). I searched the person or premises described in the Warrant and I left a copy of the Warrant with _Sealed warrant and affidavitlemail content (‘name the person searched or owner at the place of search) together with a copy of the inventory for the items seized. The following is an inventory of property taken pursuant to the warrant:
This inventory was made in the presence of Special Agent Benjamin Baker (name of applicant for the search warrant) and (‘name of owner ofpremises or property, if not available, name of other credible person witnessing the inventory.) This inventory is a true and detailed account of all the property taken pursuant to the Warrant. Signature of Officer Signature of Owner of Property or Other Witness Return made this (a.m.) (p.m.). (Judge) (Clerk) day of
After careful search, I could not find at the place, or on the person described, the property described in this warrant. Officer
RETURN AND INVENTORY
Page #2 The following is an inventory of property taken pursuant to the warrant:
This inventory is a true and detailed account of all the property taken pursuant to the Warrant.
Signature of Officer
Signature of Owner of Property or Other Witness
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