The NMFA controversy is now officially a criminal matter.

On Wednesday morning (Aug. 8th) officers with the state Securities Division arrested the chief operating officer, John T. Duff, of the New Mexico Finance Authority and a former controller at the authority, Greg Campbell, accusing them of submitting a forged audit, misrepresenting financial statements and trying to cover up $40 million in losses.

“I think it sends a message that we’re serious and we’re pressing forward in finding out what happened here,” J. Dee Dennis Jr., Superintendent of the State Regulation and Licensing Department, told reporters Wednesday morning.

The two arrests come one month after it was learned that the NMFA, which essentially acts as a bank for municipalities and agencies across New Mexico for funding bonds and infrastructure programs, had filed a fake audit in fiscal year 2011.

The news of the bogus audit has caused Wall Street ratings agencies to consider lowering the bond ratings for the state, which could lead to taxpayers having to pay millions of dollars more in increased interest payments.

Campbell has been identified as a “rogue” employee who allegedly created the fake audit but with the arrest of Duff, it’s clear that authorities think Campbell didn’t act alone.

In the arrest warrant filed in Santa Fe District Court late last night, Duff was Campbell’s direct supervisor. The two men face felony charges of forgery, security fraud, racketeering and conspiracy to commit racketeering.

Securities Division chief Daniel Tanaka told reporters that Duff was arrested at NMFA offices in Santa Fe while Campbell was arrested in his home in Albuquerque. Campbell and Duff are subject to a $20,000 cash or surety bond. A date for an arraignment at the First Judicial District Court in Santa Fe has not yet been set. Update: Both men bonded out later Wednesday. Campbell talked to KOB-TV briefly and said he’s willing to take the blame for the phony audit. Click here to see that story.

“These two corporate officials had strong accounting backgrounds yet they cooked the books to make their financial statements looks stronger than they actually were,” Tanaka said in a news release.

As fate would have it, the NMFA board of directors met on Wednesday morning and the arrests were discussed at the end of the board’s meeting.

“The arrests were a necessary and logical next step after the issuance of a search warrant,” board chairwoman Nann Winter told Capitol Report New Mexico. “I wasn’t surprised,” she added. “In part because I’m a lawyer and I understand when a search warrant is executed and it’s strictly to nail down chain of custody and evidence, something’s going to happen.”

The criminal complaint also alleges that Campbell, with the explicit knowledge and permission of Duff, misrepresented approximately $40 million in the financial statements for NMFA for 2010 and 2011. Instead of reporting a loss of $40 million in revenues, they are accused of concealing that loss by fraudulently reporting it under grant expenses.

What would be the motivation of Campbell and Duff?

While Tanaka wouldn’t give specifics when asked by Capitol Report New Mexico, he said: “Unfortunately, there have been numerous instances, throughout the country and throughout the world, of corporate officers who have made a decision to mischaracterize, falsely represent the financial condition of their company to investors, to the public, to make the company appear healthier than it in fact is. And that’s a trend we have seen nationally and unfortunately it appears that’s what happened here as well.”

So what does that say about the financial health of the NMFA?

“We have no reason to believe that the NMFA is in fiscal trouble at this point,” Tanaka said. “But certainly steps were taken to falsely represent the financial condition and to make it appear stronger than it was.”

Here’s video of that exchange:

 

NMFA board meeting, 8/8/12

At Wednesday’s board meeting, John Bemis of the state’s Energy, Minerals and Natural Resources Department asked NMFA Chief Executive Officer Rick May whether Duff is still an NMFA employee.

May said the authority is taking advice of counsel and will address the issue — as well as other personnel questions — to the board tomorrow at 10 a.m.

We asked Winter if she feels better or worse about the status of the NMFA in light of the arrests and ongoing investigations by the Securities Division, the State Auditors Office and an independent audit that is waiting in the wings.

“Do I feel better about the process? I’m confident we’ve got the right resources engaged,” Winter said, adding, “Bringing this agency back to a credible lending status and a borrowers status, I’m more comfortable we’re heading in the right direction. But until we have answers to how and why, I’m not comfortable about the state of affairs.”

Last month, New Mexico Watchdog reported that the fake audit appeared to be made at least partially by using the 2010 fiscal year audit and simply whiting out the second zero in “2010″ and replacing it with a “1.” Wednesday’s news release seems to confirm that, saying, “Campbell stated he obtained the audit reports from the fiscal year 2010 audit and ‘copied and pasted’ the letterhead and signatures onto a printed copy of the PDF file. Campbell stated he then copied the entire report and scanned it into a PDF file in order to disseminate copies of the financial statements and forged reports to external and internal recipients.”

Campbell talked to KOB-TV last month and admitted he “put those papers together” and that criticism of him “probably is fair because it was under my supervision to get the audit done and completed,” but maintained he was only putting together a draft, not a forgery.

The whole mess has put large bonding projects on hold across the state (including a $27.2 million housing development plan in Albuquerque), although the NMFA does have some $37 million in reserve for smaller projects.

Roundhouse legislator Luciano “Lucky” Varela (D-Santa Fe) told Capitol Report New Mexico that he hopes “ultimately we can get over this so we can continue to finance these projects … So we need to resolve this thing as soon as possible.”

State Auditor Hector Balderas appeared before the board Wednesday, praising how well the NMFA staff is working with his associates and saying his office’s special audit “is moving very quickly” towards getting an accurate and correct reading of finances so the NMFA’s new audit can get back into compliance with state regulations.

Baldeas also announced that the accounting firm of PricewaterhouseCoopers has been retained to conduct an assessment of the NMFA and told the board members he hopes to “have a rather meaty report” for the board before October.

Here’s what Superintendent Dennis of the Regulations and Licensing Department told reporters Wednesday morning:

 

You can read the news release put out by the Securities Division by clicking here.

We’ll post updates on this story throughout the day.