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SEC finds ex-Big Dig chief negligent, not fraudulent

By Frank Phillips, Globe Staff, 7/2/2003

Wrapping up its probe, the staff of the Securities and Exchange Commission has found former Big Dig chief James Kerasiotes negligent for failing to disclose the project's $1.4 billion overrun in 1999, but has concluded that Kerasiotes committed no fraud and did not intend to deceive bondholders, according to a settlement agreement reviewed by the Globe.

Kerasiotes, who ran the Central Artery/Ted Williams Tunnel project until he was fired in 2000, has agreed to sign the settlement with the agency to bring the matter to a close, but he is not admitting negligence, said a source who talked with him yesterday.

The settlement must be submitted to the SEC commissioners for final approval, but such approval is usually routine.

Kerasiotes faces no fines, citations, or reprimands as a result of the staff findings. The settlement also concludes that no investors were harmed by Kerasiotes's actions, and that the state's bond rating was not affected.

''Kerasiotes was not unjustly enriched and did not profit financially by his conduct in connection with any of the bond offerings at issue in this matter, and no investor suffered a financial loss,'' the SEC document reads.

Kerasiotes declined comment. His attorney, Joseph Savage, did not returns calls to his office yesterday.

The SEC probe began more than three years ago, after Kerasiotes acknowledged to state officials and the news media that the highway project's costs would exceed its budget of $10.8 billion. That revelation, in February 2000, shook state government, in part because of Kerasiotes's longheld, emphatic insistence that he could complete the project for that amount.

Critics said Kerasiotes should have revealed the cost overrun when state officials went to Wall Street in December 1999 to brief bond-rating agencies on the state's fiscal condition. Kerasiotes responded publicly that he and his staff were working to establish the exact size of the overrun, and wanted to disclose it when they knew the scope of the problem.

In its investigation, the SEC staff found that Kerasiotes, in failing to reveal the overrun before February, was motivated by a desire to keep the project's costs down. Kerasiotes feared that publicly announcing a higher price tag would be a self-fulfilling prophecy, the settlement agreement said, with contractors submitting higher bills to the state as a result.

Despite his motivation, the SEC staff said, he was negligent in delaying the reporting.

Kerasiotes had also argued to the SEC that he and his staff had followed the same procedure - namely, determining the exact figures and trying to find cuts and new revenues before disclosing budget problems - when the cost of the project rose in 1994.

That action five years earlier was not criticized by the SEC or any other enforcement group. Kerasiotes also said the Federal Highway Administration knew about the 1999 process, which was approved by lawyers for the Massachusetts Turnpike Authority and the authority's private bond attorneys. The SEC could have sought civil complaints in federal court against Kerasiotes, or initiated an internal legal proceeding before an administrative law judge at the SEC. The agency could have issued penalties or fines, or imposed limitations on his professional activities.

The settlement does not mention former project manager Patrick Moynihan, which sources who have reviewed the agreement said is an exoneration of his role in the case. Moynihan was a key player in the fall of 1999 when the Big Dig staff was struggling to determine the scope of the cost overrun.

A friend of both Moynihan and Kerasiotes said yesterday that Kerasiotes decided to sign the settlement agreement in part because the SEC had indicated that if he did, the agency would not pursue a case against Moynihan.

The SEC staff delivered the settlement agreement to Turnpike Authority officials within the last several weeks. The authority is expected to approve the agreement.

The staff will then take the agreement before the full commission for its final approval. Rarely do the commissioners overturn a staff recommendation, although that has occured in some high-profile cases, a legal source who has worked on SEC cases said yesterday.

The Big Dig, the largest and most expensive public infrastructure project in the nation's history, is now expected to cost $14.7 billion and be completed by 2005.

This story ran on page A1 of the Boston Globe on 7/2/2003.
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