DECISION AND ORDER INTRODUCTION The Securities and Exchange Commission (“SEC”) brings this civil enforcement action against the City of Rochester, its former financial director, Rosiland Brooks-Harris (collectively, the “City Defendants”), and its municipal advisors, Capital Market Advisors, LLC, Richard Ganci, and Richard Tortora (collectively, the “CMA Defendants”).1 (Dkt. 1). As relevant here, the SEC alleges that Defendants made materially misleading statements and omissions in the offering documents used to sell roughly $119 million in municipal bonds to investors. The City Defendants move for judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c). (Dkt. 45). The CMA Defendants move for partial judgment on the pleadings.2 (Dkt. 47). The Court heard oral argument on the motions on February 15, 2024, at which time it reserved decision. (Dkt. 90). For the reasons discussed below, both motions are denied. BACKGROUND As required on a motion to dismiss, the Court treats the SEC’s factual allegations as true and draws all inferences in its favor. I. Relevant accounting principles Municipalities organize their accounting on a fund basis. See Government Accounting Standards Board (GASB) Cod. §1100.102, https://gars.gasb.org (last visited March 2, 2024). “Expendable assets are assigned to the various governmental funds according to the purposes for which they may or must be used; current liabilities are assigned to the fund from which they are to be paid; and the difference between governmental fund assets and deferred outflows of resources, and liabilities and deferred inflows of resources, the fund equity, is referred to as ‘Fund Balance.’” Id. at §1300.102(a). The fund balance is what would remain if all assets were used to satisfy all liabilities. “A reasonable level of unrestricted, unappropriated fund balance provides a cushion for unforeseen expenditures or revenue shortfalls and helps assure that adequate cash flow is available to meet the cost of operations.” Off. of the N.Y. State Comptroller, Local Government Management Guide: Reserve Funds, at 1 (Feb. 2022) (“OSC Local Government Management”).3 “[A] positive current unrestricted fund balance” is considered a sign of good municipal financial health. 34 C.F.R. §668.15(b)(9)(ii). A budget deficit may be appropriately paid out of a municipality’s fund balance, so long as the deficit amount does not exceed the fund balance amount. GASB, Standards of Governmental Accounting and Financial Reporting, Standard 54 16.4 II. Legal relationship between the City and the District Under state law, the school district for each of the so-called “Big Five” cities (Buffalo, New York City, Rochester, Syracuse, and Yonkers) is a separate and distinct legal entity from the cities themselves. See N.Y. Educ. Law §2551; Lanza v. Wagner, 11 N.Y.2d 317, 326 (1962) (noting each district is “an independent corporation separate and distinct from the city, created by the State for the purpose of carrying out a purely State function”). “[M]unicipalit[ies] must make appropriations of money to run the schools,” but once appropriated, how that money is spent is solely within the control of the school district. Divisich v. Marshall, 281 N.Y. 170, 173-74 (1939). Each of the Big Five school districts prepare annual budgets that are then submitted to each city for approval. See N.Y. Educ. Law §2576(1); see also id. §2576(2) (providing that in Rochester, such estimate shall be filed with the mayor). The cities may adjust the amount allocated, as “[t]he city has the machinery for raising the money by taxation and must see that the total appropriations do not exceed constitutional limitations.” Divisich, 281 N.Y. at 174. Once the budget is approved, districts possess complete discretion to spend more or less than the amounts allocated to each line item. Id. at 174 (“As to when, how, and where the amounts placed at their disposal shall be disbursed, each [district] exercises an independent judgment, uncontrolled by and in no respect interfered with or influenced by the city authorities.”). State law forbids a district from overspending its budget. N.Y. Educ. Law §2576(7) (a district “shall not incur a liability or an expense chargeable against the funds under its control or the city for any purpose in excess of the amount appropriated or available therefor or otherwise authorized by law”); see also Fuhrmann v. Graves, 203 A.D. 507, 509 (4th Dep’t 1922) (a district “must confine its expenditures within the limit of appropriation for educational purposes”). III. Bond mechanics Municipal bonds are used to provide cash to local government entities, including school districts. The municipal bonds at issue here are short-term notes, intended to “bridge gaps between the periodic collection of governmental revenues (through taxes, fines, fees, etc.) and the more pressing spending demands placed upon local governments. In effect, they are a means of smoothing out and maintaining local governmental tax flows.” Joel A. Mintz & Ronald A. Rosenberg, Fundamentals of Municipal Finance at 14 (2d Ed. 2019). Revenue anticipation notes, or RANs, “are issued in anticipation of sales taxes, rents, fees, charges, and other revenues other than real estate taxes.” Id. Bond anticipation notes, or BANs, are “issued to provide short-term financing,” usually in anticipation of the municipality securing more permanent financing in the future. Id. The Big Five districts cannot issue their own municipal bonds, but the Big Five cities may issue the bonds on behalf of the districts. “The State Constitution prohibits the City from contracting any indebtedness unless it pledges its ‘faith and credit’ for the payment of the principal and interest on the debt.” See Local Gov’t Assistance Corp. v. Sales Tax Asset Receivable Corp., 2 N.Y.3d 524, 539 (2004). “The purpose of this provision is obvious — to ensure that the municipalities honor their legal financial obligations to their creditors.” Id. A pledge of a city’s “faith and credit” means “the issuing government pledges to use all available revenue sources that are available to it, including but not limited to tax revenues, to repay the principal and interest on the bonds in a timely manner.” Fundamentals of Municipal Finance at 8. IV. The 2019 Bond Offering The District’s fund balance declined more than $27 million between 2014 and 2018, primarily due to operating deficits. (Dkt. 1 at 25). And for fiscal 2019 (July 1, 2018-June 30, 2019), the District’s budget indicated that it intended to use an additional $15 million of reserves to offset expenditures. (Id. at 27). “However, by November 2018, the District’s overspending was accelerating. The bulk of the overspending was to cover teacher salaries.” (Id.). The District began turning to the City for short-term loans to meet its expenses. (Id.). Rosiland Brooks-Harris (“Brooks-Harris”) and other City executives began meeting with the District’s financial staff on a weekly basis “to discuss the District’s cash flow issues.” (Id. at 28). They also started receiving weekly cash flow statements from the District. (Id.). “Through those meetings and through weekly cash flow statements which District staff provided to her, Brooks-Harris became aware of the District’s overspending in fiscal year 2019, and that the overspending was due to increases in teacher salaries.” (Id.). “Prior to the note offering, Brooks-Harris was also aware of the District’s $63 million decline in cash in fiscal year 2019.” (Id.). The District’s financial condition led to the decision to issue the municipal bonds at issue here. (Id. at 30). Prior to this bond offering, the last time the City issued a RAN on behalf of the District was 2004. (Id.). As the City’s director of finance, Brooks-Harris managed the City’s bond offerings. (Id. at
14, 21). She oversaw the preparation of the offering documents for the RAN and the BAN, and signed the offering documents on behalf of the City. (Id. at
