News broke late on Friday, December 2 that the U.S. Securities and Exchange Commission had opened an investigation into the financing of the Miami Marlins' new stadium. The Miami Herald reported that the SEC had issued broad subpoenas to the City of Miami and Miami-Dade County for all sorts of documents relating to the decision to publicly-finance the stadium, including communications with Marlins executives and representatives of Major League Baseball. Copies of the subpoenas can be found here and here.
The focus of the probe is believed to be three-fold:
First, whether the City, County or Marlins submitted false or misleading information about the Marlins' finances to those who purchased the more than $600 million in bonds to finance the new stadium. The Marlins' free-agent spending spree -- now over $160 million for just Jose Reyes, Heath Bell and Mark Buehrle -- is sure to heighten concern that the Marlins downplayed the team's finances in order to secure public funding for the stadium.
Second, the tax status of the stadium parking garage, which has apparently left the City and County with a hefty tax bill and the Marlins unwilling to help defray the costs; and
Third, whether Marlins executives and others made campaign contributions to City and County elected officials in exchange for promises to approve the stadium financing. This is often referred to as a "pay to play" investigation.
In order to understand how the investigation is likely to play out -- and how it will impact the Marlins -- a little background on SEC investigations is useful.
The SEC's Division of Enforcement conducts these types of investigations after obtaining the approval of the full Commission. As is the case here, the investigations typically begin with subpoenas for documents. The subpoenas are often very broad, asking for a wide range of documents and communications related to the transaction at issues. The parties who have been subpoenaed usually have 30 days to comply.
Well, that's what subponeas say, but rarely does anyone produce all of the documents sought, and rarely does anyone produce anything by the original deadline. What typically happens next is that lawyers for the subpoenaed parties negotiate with lawyers in the Enforcement Division over the scope of the subpoenas and timing for producing the requested documents. Lawyers for involved third parties -- here, the Marlins -- will also be involved. The targets of the subpoena, obviously, want to limit the number and kind of documents that must be turned over: limit by subject, limit by date, limit any way they can. Lots of lawyers are involved. Lots of billable hours are charged. This negotiation process can and often does take months.
Unless the SEC directs a subpoena to the Marlins, the team's involvement in the investigation will be somewhat limited until the SEC starts taking depositions of the key witnesses. Depositions are a question-and-answer session, under oath; testimony provided in a deposition can be used in a later trial or other court proceeding. Based on the subpoenas and the reporting done by the Miami Herald, we can expect that the SEC will want to depose Marlins team owner Jeffrey Loria, team President David Samson, MLB Commissioner Bud Selig and MLB Chief Operating Officer Bob DuPuy, among others.
All witnesses are obligated to tell the truth in depositions, but when the SEC is the one asking the questions, the penalties for not telling the truth can be very steep. Remember Martha Stewart? Depending on what actually happened, these under-oath depositions may get sticky for Marlins executives.
After the documents have been produced and witnesses have been deposed, the Enforcement Division will make a recommendation to the full SEC on how to proceed. If the SEC concludes that securities laws were violated, the most likely outcome is a civil suit. Against whom? It's anyone's guess right now.
The SEC is not authorized to file criminal charges. If the SEC concludes that criminal securities laws were violated, they refer the case to the U.S. Justice Department. It's far too early to tell what the investigation will uncover and whether criminal charges will be forthcoming.
What we do know is that the investigation is serious. The SEC doesn't authorize the Enforcement Division to begin an investigation unless it has good reasons to believe there has been some wrongdoing.