SEC v. Carla Merka, No. 4:22-cv-841, Southern District of Texas (Mar. 16, 2022) — Complaint

UNITED STATES DISTRICT COURT
 FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
__________________________________________
)
SECURITIES AND EXCHANGE COMMISSION, )
 )
  Plaintiff,     ) Civil Action No.:  4:22-cv-841
)
 v.      )
)
CARLA MERKA, )
)
Defendant. )
__________________________________________)

COMPLAINT

Plaintiff United States Securities and Exchange Commission (the “SEC”) alleges:
SUMMARY OF ALLEGATIONS
1. In January 2018, Crosby Independent School District (“Crosby” or the “District”)
issued $20 million in municipal bonds using audited financial statements from Crosby’s fiscal year
2017 (“FY17”).  Crosby’s FY17 financial statements failed to report $11.7 million in payroll and
construction liabilities for the District and falsely reported $5.4 million in reserves in the District’s
General Fund.  Crosby disclosed its depletion of General Fund reserves to the public in August
2018 and the District declared a financial exigency and instituted mid-year layoffs.  Additionally,
S&P  downgraded  Crosby’s  bonds  to  A-  from  AA-  as  a  result  of  the  restatement  and  “rapid
deterioration” of the District’s reserves.   In February 2019, the District restated its FY17 General
Fund reserves to negative ($6.3) million.
2. Prior to the issuance of the bonds, Crosby’s Chief Financial Officer, Carla Merka,
knew that Crosby’s payroll and construction liabilities were significantly higher than the amounts
recorded in the FY17 audited financial statements.  Merka, however, failed to determine the true
amount of the liabilities, and never informed Crosby’s auditors that she knew that the FY17 payroll

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and construction liabilities were substantially understated.  Merka nonetheless submitted Crosby’s
FY17  audited  financial  statements  to  the  bond  financing  team  to  be  included  in  the  offering
documents, which Merka knew were disclosed to prospective investors.
3. As  a  result  of  this  conduct,  Merka  violated  Sections  17(a)(1)  and  17(a)(3)  of  the
Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934
(“Exchange Act”) and Rule 10b-5 thereunder.
DEFENDANT
4. Carla Merka, age 57, is a resident of Dayton, Texas.  Merka has over twenty years
of accounting experience, but has never been a CPA or held any professional accounting license.
From  March  2014  through  May  2018,  she  served  as  Crosby’s  CFO.    As  Crosby’s  CFO,  Merka
supervised at least eight accounting employees and had primary responsibility over the preparation
of  Crosby’s  financial  statements  and  interaction  with  Crosby’s  external  auditor.    In  June  2018,
Merka left Crosby to become CFO of another independent school district in Texas, a position she
continues to hold.
OTHER RELEVANT ENTITY
5. Crosby Independent School District is a public school district based in Crosby,
Texas,  a  suburb  northeast  of  Houston,  Texas.    Crosby  operates  seven  schools  and  serves
approximately 6,400 students.
JURISDICTION AND VENUE
6. The SEC brings this action pursuant to authority conferred upon it by Sections 20(b)
and 20(d) of the Securities Act [15 U.S.C. §§ 77t(b) and 77t(d)] and Sections 21(d) and 21(e) of
the Exchange Act [ 15 U.S.C. §§ 78u(d) and 78(u)(e)].

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7. This  Court  has  jurisdiction  over  this  action  pursuant  to  Section  22(a)  of  the
Securities  Act  [15  U.S.C.  §  77v(a)]  and  Sections  21(d),  21(e),  and  27  of  the  Exchange  Act  [15
U.S.C. §§ 78u(d), 78u(e), and 78aa].
8. Venue is proper in this District, because Crosby is located within this District and
the  acts  constituting  violations  of  the  federal  securities  laws  alleged  in  this  Complaint  occurred
within this District.
9. In connection with the conduct described in this Complaint, Defendant directly or
indirectly made use of the mails or the means or instruments of transportation or communication
in interstate commerce.
FACTUAL ALLEGATIONS
A. Crosby Lacked Funds to Complete Capital Projects

10.  In 2013, Crosby issued $86.5 million in municipal bonds (“2013 Bond”) to fund
various  capital  projects,  including  the  construction  of  a  baseball  and  softball  complex  and
renovations to its football stadium.  The District hired a general contractor and a project and risk
manager to  undertake these projects, which were expected to be completed by May 2017.  Crosby’s
then-Superintendent  was  actively  involved  in  the  construction  projects,  and  personally  directed
contractors to perform project enhancements outside the original scope of work, which inflated the
total cost of the projects.
11. In part because of the project enhancements, the District exhausted the 2013 Bond
proceeds  prematurely,  leaving  the  General  Fund  as  the  only  available source  of  funding  for
approximately $12 million of future construction commitments.

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12. Merka knew of the inflated costs and the exhaustion of the 2013 Bond proceeds.
Accordingly,  she  was  concerned  that  the  District  did  not  have  enough  funds  to  complete  the
construction projects, and was actively pursuing alternative sources of funding.
13. By  August  31,  2016,  Crosby’s  then  fiscal  year-end,  the  District’s  General  Fund
lacked  sufficient  funds  to  cover  the  $12  million  of  future  construction  expenses  required  to
complete its capital projects.  For multiple reasons, including to increase General Fund reserves
and pay for the 2013 Bond construction projects, Merka suggested, and Crosby’s Board approved,
changing the District’s fiscal year-end date from August 31 to June 30.  Merka incorrectly believed
that shifting the fiscal year-end would create “a one-time savings” of approximately $10 million.
While the change shortened Crosby’s FY17 to 10 months – from September 1, 2016 to June 30,
2017 –   it  did  not  generate  the  savings  needed  to  cover  the  construction  commitments,  and  the
District concluded its FY17 with a decrease in General Fund reserves of $5.2 million.
B.  Crosby’s FY17 Financial Reporting Failures
14. Merka prepared FY17 financial statements for Crosby that materially understated
liabilities and overstated the General Fund balance.  In particular, the FY17 financial statements
(1) failed to report construction expenses for completed capital projects, and (2) failed to report
unpaid payroll  expenses  due  to  the  change  in  fiscal  year-end.    Merka  knew  that  Crosby  had
incurred (but had not paid) these expenses as of June 30, 2017, but failed to record those liabilities
in the financial statements and failed to communicate to the District’s auditor the magnitude of the
unpaid liabilities.
i. Merka Understated Construction Expenses
15. Beginning in FY16, Merka knew that the 2013 Bond proceeds had been completely
consumed  and  Crosby  would  need  to  use  the  General  Fund  to  pay  all  remaining  construction
commitments.  By May 2017, the capital projects were substantially completed, but Crosby lacked

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sufficient funds in its General Fund to pay the estimated $8 million to $10 million in outstanding,
unpaid construction invoices.
16. In   early   June   2017,   Merka   began   sending   concerned   emails   to   Crosby’s
superintendent and the District’s municipal financial advisor,  indicating that Crosby did not have
enough  funds  to  cover  its  normal  operational  expenses  and  the  unpaid  construction  expenses.
Because Crosby could not pay for its outstanding construction commitments without raising new
bond  proceeds, the  District  persuaded  its  primary  construction  contractor  to  defer Crosby’s
outstanding payment obligations until the District received proceeds from a new bond issuance.
17. Instead of accurately recording Crosby’s unpaid construction liability of more than
$8  million,  the  District’s  FY17  financial  statements  showed  a  construction  liability  of  only
$727,000.  Merka reviewed and approved the FY17 financial statements and signed a management
representation letter sent to Crosby’s auditor falsely asserting that, among other things, the FY17
financial statements were presented in accordance with GAAP and that the District’s net position
and General Fund balance had been properly reported.
ii. Merka Understated Payroll Expenses
18. Crosby’s  teachers  are  considered  “contractual”  employees  and  represent  the  vast
majority  of  the  District’s  payroll  expenses.    Their  term  begins  at  the  start  of  each  school  year,
typically  in  mid-August.    Most  Crosby  teachers  earn  their  salaries  over  a  10-month  “contract”
period  corresponding  with  the  start  and  end  of  the  school  year.    All  contractual  employees,
however,  are  paid  evenly  over  a  12-month  period.    As  a  result,  Crosby’s  teachers  are  not  fully
compensated for their 10-month earnings until the 12-month term expires.
19. Prior to FY17, Crosby did not need to record a payroll liability for its teachers at
the end of a fiscal year, because the contractual commitments for the preceding school year had

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been paid in full by the end of the fiscal year, August 31.  By changing its fiscal year-end date
from August 31 to June 30, Crosby concluded FY17 with unpaid payroll obligations related to the
2017 contract  year.  In other words, Crosby still had to pay its teachers for two more months –
July and August 2017.  Crosby, however, failed to include these unpaid payroll liabilities, which
amounted  to  $3.8  million,  in  its  FY17  financial  statements.    Merka  knew  that  Crosby’s  auditor
incorrectly believed that all contractual employees had been paid in full as of June 30, 2017 and
did not correct this misunderstanding.
20. While  knowing  that  Crosby’s payroll  liability  was  understated,  Merka  reviewed
and approved the FY17 financial statements and signed a management representation letter sent to
the  auditor  that falsely asserted  that,  among  other  things,  the  FY17  financial  statements  were
presented in accordance with GAAP and that the District’s net position and fund balance had been
properly reported.
C.   Crosby’s Offering Documents for the 2018 Bonds Contained Material Misstatements
and Omission

21. On January 18, 2018, Crosby issued $20 million of Unlimited Tax School Building
Bonds  to  pay  its  outstanding  construction  payables  and  to  fund  new  capital  projects.    Crosby’s
erroneous  FY17  financial  statements  were  appended  to  the  Official Statement,  a  document
disclosed to prospective investors describing the essential terms of the bonds.
22. As  discussed  in  paragraphs  15-20 above,  Crosby’s  FY17  audited  financial
statements  understated  payroll  and  construction  liabilities  by  $3.8  million  and  $7.9  million,
respectively.    These  errors  resulted  in  an  overstatement  of  Crosby’s  General  Fund  reserves  by
$11.7 million.  Notably, Crosby’s FY17 financials reported a positive General Fund balance when
it  should  have  reported  a  negative  one.   Crosby’s Official Statement  disclosed  information
concerning the District’s FY17 fiscal year deficit, but the disclosures in this section were false and

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misleading  because  they  did  not  include  the  payroll  and  construction  expenses  discussed  in
paragraphs 15-20 above.
23. The misrepresentations and omissions in Crosby’s FY17 financial statements were
material to bond investors, significantly altering the total mix of information available to them in
determining whether to purchase the bonds.
24. As   CFO,   Merka   had   the ultimate   authority   over   Crosby’s   FY17   financial
statements.    She  was  Crosby’s  highest-ranking  executive  with  any  financial  or  accounting
experience.  Merka was responsible for reporting on financial issues to Crosby’s Board and often
made presentations on those subjects.  The leadership of the District relied on Merka to ensure the
financial statements were complete and accurate.  Merka was also the District’s representative in
multiple meetings and calls with the District’s financial advisor leading up to the bond offering,
including  discussions  related  to  “cash  flow  forecasts,  FYE  2017  ending  numbers,  required
disclosures, bond ratings, Plan of Finance, and Board presentations.”  Additionally, Merka was the
main point of contact for the District’s disclosure counsel, who sent her questionnaires to complete
for  purposes  of  drafting  the  Official Statement  disclosures.    Merka  reviewed  Crosby’s  Official
Statement prior to its release to prospective investors.
25. Merka knew that Crosby’s FY17 financial statements were false and misleading,
yet submitted them to the bond financing team for inclusion in the package of offering documents.
Merka  did  not  invite  the  District’s  external  auditor  to  meetings  with  the  bond  financing  team
despite  Crosby’s  municipal  advisor  making  such  a  request.  Similarly, Merka did  not  reveal  in
communications with ratings agencies the District’s true financial condition.

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D. Discovery of Crosby’s Financial Issues and Aftermath

26. Crosby’s superintendent resigned in January 2018.  Merka resigned at the end of
May 2018 and accepted a CFO position at another independent school district in Texas.  Crosby
hired  a  new CFO  and  Superintendent,  who assumed  their  positions  in  June  and  July  2018,
respectively.
27. During spring 2018, Crosby continued to face cash flow shortages due, in part, to
the construction  expenses  described  above.    Shortly  after  arriving  in  June  2018,  Crosby’s  new
CFO discovered the payroll and construction liability errors and confronted the District’s auditor
about the significant financial shortfalls.
28. In August 2018, Crosby’s leadership disclosed the financial issues to its Board and
the public, and began crafting a financial recovery plan with its financial advisor.  On September
25, 2018, Moody’s downgraded Crosby’s bonds from A1 to A3 and placed the rating under review
for  further  possible  downgrade.    In  December  2018,  Moody’s  changed  its  outlook  on  the  2018
Crosby bonds to “negative.”
29. On October 8, 2018, Crosby’s Board declared a financial exigency with the Texas
Education Agency (TEA), which allowed the District to implement a mid-year reduction in force.
On  December  6,  2018,  S&P  downgraded  Crosby’s  bonds  to  A-  from  AA-  due  to  “the  district’s
rapid  deterioration  of  reserves  stemming  from  overspending,  overestimating  revenues,  and  a
mistake in the audit that led to a negative prior period adjustment and the depletion of reserves.”
S&P also changed its outlook on Crosby bonds from “stable” to “negative.”  In February 2019, the
District’s auditor issued its audit report for Crosby’s FY18 financial statements, which included
material restatements of the FY17 ending balances.

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FIRST CLAIM FOR RELIEF
Fraud in the Offer or Sale of Securities
Sections 17(a)(1) and 17(a)(3) of the Securities Act
30. The SEC incorporates the allegations in paragraphs 1 through 29 as if fully set forth
herein.
31. By  engaging  in  the  acts  and  conduct  alleged  herein,  Defendant,  directly  or
indirectly, in the offer or sale of securities,  by the use of any means or instruments of transportation
or communication in interstate commerce or by use of the mails, has:
a.  knowingly or with severe recklessness employed a device, scheme, or artifice to
defraud; and
b. knowingly, recklessly, or negligently engaged in a transaction, practice, or course
of business which operated or would operate as a fraud or deceit upon the purchaser.
32. Defendant  violated  and, unless  restrained  and  enjoined, will  continue  to  violate
Sections 17(a)(1) and 17(a)(3) of the Securities Act [15 U.S.C. § 77q(a)(1) and (3)].
SECOND CLAIM FOR RELIEF
Fraud in Connection with the Purchase or Sale of Securities
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder
33. The SEC incorporates the allegations in paragraphs 1 through 29 as if fully set forth
herein.
34. By  engaging  in  the  acts  and  conduct  alleged  herein,  Defendant,  directly  or
indirectly, in  connection  with  the  purchase  or  sale  of  securities,  by  the  use  of  any means  or
instrumentality of interstate commerce, or of the mails or of any facility of any national securities
exchange, knowingly or with severe recklessness:
a. employed a device, scheme, or artifice to defraud;

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b. made untrue statements of material facts or omitted to state material facts necessary
in  order  to  make  the  statements  made,  in  light  of  the  circumstances  under  which
they were made, not misleading; and
c. engaged in an act, practice, or course of business which operated or would operate
as a fraud or deceit upon any person.
35. Defendant  violated  and,   unless  restrained  and  enjoined, will  continue  to  violate
Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5   thereunder [17 C.F.R. §
240.10b-5].
RELIEF REQUESTED
 WHEREFORE, the SEC respectfully requests that this Court enter a judgment:
I.
 Finding that the Defendant committed the violations alleged in this Complaint.
II.
 Permanently enjoining,  pursuant to Rule 65(d) of the Federal Rules of Civil Procedure,  the
Defendant  from  violating  Section  17(a)  of  the  Securities  Act  [15  U.S.C.  §  77q(a)]  and  Section
10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5   thereunder [17 C.F.R. § 240.10b-
5].
III.
 Ordering Defendant to pay a civil penalty pursuant to Section 20(d) of the Securities Act
[15 U.S.C. § 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)].
IV.
 Permanently barring Defendant from participating in any offering of municipal securities,
including engaging in activities with a broker, dealer, or issuer for purposes of issuing, trading, or

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inducing or attempting to induce the purchase or sale of any municipal security, provided however,
that such injunction shall not prevent Defendant from purchasing or selling municipal securities
for her own personal account.
V.
 Retaining jurisdiction over this action to implement and carry out the terms of all orders
and decrees that may be entered, or to entertain any suitable application or motion for additional
relief within the jurisdiction of this Court.
VI.
 Granting such other and further relief as this Court deems just and appropriate.
Dated:  March 16, 2022
       Respectfully submitted,

___________________________
Matthew J. Gulde
Illinois Bar No. 6272325
SDTX Bar No. 1821299
United States Securities and
Exchange Commission
Burnett Plaza, Suite 1900
801 Cherry Street, Unit 18
Fort Worth, TX  76102
Telephone:  (817) 978-1410
Facsimile:  (817) 978-4927
[email protected]

Attorney for Plaintiff United States
Securities and Exchange Commission

UNITED STATES DISTRICT COURT 
 FOR THE SOUTHERN DISTRICT OF TEXAS 

HOUSTON DIVISION 
__________________________________________ 

) 
SECURITIES AND EXCHANGE COMMISSION, ) 
 )      

  Plaintiff,     ) Civil Action No.:  4:22-cv-841  
)      

 v.      ) 
) 

CARLA MERKA, )        
) 

Defendant. ) 
__________________________________________) 
  

COMPLAINT  
 

Plaintiff United States Securities and Exchange Commission (the “SEC”) alleges: 

SUMMARY OF ALLEGATIONS 

1. In January 2018, Crosby Independent School District (“Crosby” or the “District”) 

issued $20 million in municipal bonds using audited financial statements from Crosby’s fiscal year 

2017 (“FY17”).  Crosby’s FY17 financial statements failed to report $11.7 million in payroll and 

construction liabilities for the District and falsely reported $5.4 million in reserves in the District’s 

General Fund.  Crosby disclosed its depletion of General Fund reserves to the public in August 

2018 and the District declared a financial exigency and instituted mid-year layoffs.  Additionally, 

S&P downgraded Crosby’s bonds to A- from AA- as a result of the restatement and “rapid 

deterioration” of the District’s reserves.  In February 2019, the District restated its FY17 General 

Fund reserves to negative ($6.3) million. 

2. Prior to the issuance of the bonds, Crosby’s Chief Financial Officer, Carla Merka, 

knew that Crosby’s payroll and construction liabilities were significantly higher than the amounts 

recorded in the FY17 audited financial statements.  Merka, however, failed to determine the true 

amount of the liabilities, and never informed Crosby’s auditors that she knew that the FY17 payroll 

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and construction liabilities were substantially understated.  Merka nonetheless submitted Crosby’s 

FY17 audited financial statements to the bond financing team to be included in the offering 

documents, which Merka knew were disclosed to prospective investors. 

3. As a result of this conduct, Merka violated Sections 17(a)(1) and 17(a)(3) of the 

Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 

(“Exchange Act”) and Rule 10b-5 thereunder. 

DEFENDANT 

4. Carla Merka, age 57, is a resident of Dayton, Texas.  Merka has over twenty years 

of accounting experience, but has never been a CPA or held any professional accounting license.  

From March 2014 through May 2018, she served as Crosby’s CFO.  As Crosby’s CFO, Merka 

supervised at least eight accounting employees and had primary responsibility over the preparation 

of Crosby’s financial statements and interaction with Crosby’s external auditor.  In June 2018, 

Merka left Crosby to become CFO of another independent school district in Texas, a position she 

continues to hold. 

OTHER RELEVANT ENTITY 

5. Crosby Independent School District is a public school district based in Crosby, 

Texas, a suburb northeast of Houston, Texas.  Crosby operates seven schools and serves 

approximately 6,400 students.   

JURISDICTION AND VENUE 

6. The SEC brings this action pursuant to authority conferred upon it by Sections 20(b) 

and 20(d) of the Securities Act [15 U.S.C. §§ 77t(b) and 77t(d)] and Sections 21(d) and 21(e) of 

the Exchange Act [15 U.S.C. §§ 78u(d) and 78(u)(e)]. 

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7. This Court has jurisdiction over this action pursuant to Section 22(a) of the 

Securities Act [15 U.S.C. § 77v(a)] and Sections 21(d), 21(e), and 27 of the Exchange Act [15 

U.S.C. §§ 78u(d), 78u(e), and 78aa]. 

8. Venue is proper in this District, because Crosby is located within this District and 

the acts constituting violations of the federal securities laws alleged in this Complaint occurred 

within this District. 

9. In connection with the conduct described in this Complaint, Defendant directly or 

indirectly made use of the mails or the means or instruments of transportation or communication 

in interstate commerce.   

FACTUAL ALLEGATIONS 

A. Crosby Lacked Funds to Complete Capital Projects 
 

10.  In 2013, Crosby issued $86.5 million in municipal bonds (“2013 Bond”) to fund 

various capital projects, including the construction of a baseball and softball complex and 

renovations to its football stadium.  The District hired a general contractor and a project and risk 

manager to undertake these projects, which were expected to be completed by May 2017.  Crosby’s 

then-Superintendent was actively involved in the construction projects, and personally directed 

contractors to perform project enhancements outside the original scope of work, which inflated the 

total cost of the projects.   

11. In part because of the project enhancements, the District exhausted the 2013 Bond 

proceeds prematurely, leaving the General Fund as the only available source of funding for 

approximately $12 million of future construction commitments.   

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12. Merka knew of the inflated costs and the exhaustion of the 2013 Bond proceeds.  

Accordingly, she was concerned that the District did not have enough funds to complete the 

construction projects, and was actively pursuing alternative sources of funding. 

13. By August 31, 2016, Crosby’s then fiscal year-end, the District’s General Fund 

lacked sufficient funds to cover the $12 million of future construction expenses required to 

complete its capital projects.  For multiple reasons, including to increase General Fund reserves 

and pay for the 2013 Bond construction projects, Merka suggested, and Crosby’s Board approved, 

changing the District’s fiscal year-end date from August 31 to June 30.  Merka incorrectly believed 

that shifting the fiscal year-end would create “a one-time savings” of approximately $10 million.  

While the change shortened Crosby’s FY17 to 10 months – from September 1, 2016 to June 30, 

2017 – it did not generate the savings needed to cover the construction commitments, and the 

District concluded its FY17 with a decrease in General Fund reserves of $5.2 million. 

B.  Crosby’s FY17 Financial Reporting Failures 

14. Merka prepared FY17 financial statements for Crosby that materially understated 

liabilities and overstated the General Fund balance.  In particular, the FY17 financial statements 

(1) failed to report construction expenses for completed capital projects, and (2) failed to report 

unpaid payroll expenses due to the change in fiscal year-end.  Merka knew that Crosby had 

incurred (but had not paid) these expenses as of June 30, 2017, but failed to record those liabilities 

in the financial statements and failed to communicate to the District’s auditor the magnitude of the 

unpaid liabilities. 

i. Merka Understated Construction Expenses  

15. Beginning in FY16, Merka knew that the 2013 Bond proceeds had been completely 

consumed and Crosby would need to use the General Fund to pay all remaining construction 

commitments.  By May 2017, the capital projects were substantially completed, but Crosby lacked 

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sufficient funds in its General Fund to pay the estimated $8 million to $10 million in outstanding, 

unpaid construction invoices. 

16. In early June 2017, Merka began sending concerned emails to Crosby’s 

superintendent and the District’s municipal financial advisor, indicating that Crosby did not have 

enough funds to cover its normal operational expenses and the unpaid construction expenses.  

Because Crosby could not pay for its outstanding construction commitments without raising new 

bond proceeds, the District persuaded its primary construction contractor to defer Crosby’s 

outstanding payment obligations until the District received proceeds from a new bond issuance. 

17. Instead of accurately recording Crosby’s unpaid construction liability of more than 

$8 million, the District’s FY17 financial statements showed a construction liability of only 

$727,000.  Merka reviewed and approved the FY17 financial statements and signed a management 

representation letter sent to Crosby’s auditor falsely asserting that, among other things, the FY17 

financial statements were presented in accordance with GAAP and that the District’s net position 

and General Fund balance had been properly reported.   

ii. Merka Understated Payroll Expenses   

18. Crosby’s teachers are considered “contractual” employees and represent the vast 

majority of the District’s payroll expenses.  Their term begins at the start of each school year, 

typically in mid-August.  Most Crosby teachers earn their salaries over a 10-month “contract” 

period corresponding with the start and end of the school year.  All contractual employees, 

however, are paid evenly over a 12-month period.  As a result, Crosby’s teachers are not fully 

compensated for their 10-month earnings until the 12-month term expires.   

19. Prior to FY17, Crosby did not need to record a payroll liability for its teachers at 

the end of a fiscal year, because the contractual commitments for the preceding school year had 

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been paid in full by the end of the fiscal year, August 31.  By changing its fiscal year-end date 

from August 31 to June 30, Crosby concluded FY17 with unpaid payroll obligations related to the 

2017 contract year.  In other words, Crosby still had to pay its teachers for two more months – 

July and August 2017.  Crosby, however, failed to include these unpaid payroll liabilities, which 

amounted to $3.8 million, in its FY17 financial statements.  Merka knew that Crosby’s auditor 

incorrectly believed that all contractual employees had been paid in full as of June 30, 2017 and 

did not correct this misunderstanding. 

20. While knowing that Crosby’s payroll liability was understated, Merka reviewed 

and approved the FY17 financial statements and signed a management representation letter sent to 

the auditor that falsely asserted that, among other things, the FY17 financial statements were 

presented in accordance with GAAP and that the District’s net position and fund balance had been 

properly reported. 

C.   Crosby’s Offering Documents for the 2018 Bonds Contained Material Misstatements 
and Omission 

 
21. On January 18, 2018, Crosby issued $20 million of Unlimited Tax School Building 

Bonds to pay its outstanding construction payables and to fund new capital projects.  Crosby’s 

erroneous FY17 financial statements were appended to the Official Statement, a document 

disclosed to prospective investors describing the essential terms of the bonds.     

22. As discussed in paragraphs 15-20 above, Crosby’s FY17 audited financial 

statements understated payroll and construction liabilities by $3.8 million and $7.9 million, 

respectively.  These errors resulted in an overstatement of Crosby’s General Fund reserves by 

$11.7 million.  Notably, Crosby’s FY17 financials reported a positive General Fund balance when 

it should have reported a negative one.  Crosby’s Official Statement disclosed information 

concerning the District’s FY17 fiscal year deficit, but the disclosures in this section were false and 

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misleading because they did not include the payroll and construction expenses discussed in 

paragraphs 15-20 above. 

23. The misrepresentations and omissions in Crosby’s FY17 financial statements were 

material to bond investors, significantly altering the total mix of information available to them in 

determining whether to purchase the bonds. 

24. As CFO, Merka had the ultimate authority over Crosby’s FY17 financial 

statements.  She was Crosby’s highest-ranking executive with any financial or accounting 

experience.  Merka was responsible for reporting on financial issues to Crosby’s Board and often 

made presentations on those subjects.  The leadership of the District relied on Merka to ensure the 

financial statements were complete and accurate.  Merka was also the District’s representative in 

multiple meetings and calls with the District’s financial advisor leading up to the bond offering, 

including discussions related to “cash flow forecasts, FYE 2017 ending numbers, required 

disclosures, bond ratings, Plan of Finance, and Board presentations.”  Additionally, Merka was the 

main point of contact for the District’s disclosure counsel, who sent her questionnaires to complete 

for purposes of drafting the Official Statement disclosures.  Merka reviewed Crosby’s Official 

Statement prior to its release to prospective investors.   

25. Merka knew that Crosby’s FY17 financial statements were false and misleading, 

yet submitted them to the bond financing team for inclusion in the package of offering documents.  

Merka did not invite the District’s external auditor to meetings with the bond financing team 

despite Crosby’s municipal advisor making such a request.  Similarly, Merka did not reveal in 

communications with ratings agencies the District’s true financial condition.  

 
 
 
 

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D. Discovery of Crosby’s Financial Issues and Aftermath  
 

26. Crosby’s superintendent resigned in January 2018.  Merka resigned at the end of 

May 2018 and accepted a CFO position at another independent school district in Texas.  Crosby 

hired a new CFO and Superintendent, who assumed their positions in June and July 2018, 

respectively. 

27. During spring 2018, Crosby continued to face cash flow shortages due, in part, to 

the construction expenses described above.  Shortly after arriving in June 2018, Crosby’s new 

CFO discovered the payroll and construction liability errors and confronted the District’s auditor 

about the significant financial shortfalls. 

28. In August 2018, Crosby’s leadership disclosed the financial issues to its Board and 

the public, and began crafting a financial recovery plan with its financial advisor.  On September 

25, 2018, Moody’s downgraded Crosby’s bonds from A1 to A3 and placed the rating under review 

for further possible downgrade.  In December 2018, Moody’s changed its outlook on the 2018 

Crosby bonds to “negative.” 

29. On October 8, 2018, Crosby’s Board declared a financial exigency with the Texas 

Education Agency (TEA), which allowed the District to implement a mid-year reduction in force.  

On December 6, 2018, S&P downgraded Crosby’s bonds to A- from AA- due to “the district’s 

rapid deterioration of reserves stemming from overspending, overestimating revenues, and a 

mistake in the audit that led to a negative prior period adjustment and the depletion of reserves.”  

S&P also changed its outlook on Crosby bonds from “stable” to “negative.”  In February 2019, the 

District’s auditor issued its audit report for Crosby’s FY18 financial statements, which included 

material restatements of the FY17 ending balances. 

 
 

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FIRST CLAIM FOR RELIEF 
Fraud in the Offer or Sale of Securities  

Sections 17(a)(1) and 17(a)(3) of the Securities Act  

30. The SEC incorporates the allegations in paragraphs 1 through 29 as if fully set forth 

herein. 

31. By engaging in the acts and conduct alleged herein, Defendant, directly or 

indirectly, in the offer or sale of securities, by the use of any means or instruments of transportation 

or communication in interstate commerce or by use of the mails, has: 

a.  knowingly or with severe recklessness employed a device, scheme, or artifice to 

defraud; and 

b. knowingly, recklessly, or negligently engaged in a transaction, practice, or course 

of business which operated or would operate as a fraud or deceit upon the purchaser. 

32. Defendant violated and, unless restrained and enjoined, will continue to violate 

Sections 17(a)(1) and 17(a)(3) of the Securities Act [15 U.S.C. § 77q(a)(1) and (3)].   

SECOND CLAIM FOR RELIEF 
Fraud in Connection with the Purchase or Sale of Securities  

Section 10(b) of the Exchange Act and Rule 10b-5 thereunder  

33. The SEC incorporates the allegations in paragraphs 1 through 29 as if fully set forth 

herein. 

34. By engaging in the acts and conduct alleged herein, Defendant, directly or 

indirectly, in connection with the purchase or sale of securities, by the use of any means or 

instrumentality of interstate commerce, or of the mails or of any facility of any national securities 

exchange, knowingly or with severe recklessness: 

a. employed a device, scheme, or artifice to defraud; 

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b. made untrue statements of material facts or omitted to state material facts necessary 

in order to make the statements made, in light of the circumstances under which 

they were made, not misleading; and 

c. engaged in an act, practice, or course of business which operated or would operate 

as a fraud or deceit upon any person. 

35. Defendant violated and, unless restrained and enjoined, will continue to violate 

Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 

240.10b-5]. 

RELIEF REQUESTED 

 WHEREFORE, the SEC respectfully requests that this Court enter a judgment: 

I. 

 Finding that the Defendant committed the violations alleged in this Complaint.  

II. 

 Permanently enjoining, pursuant to Rule 65(d) of the Federal Rules of Civil Procedure, the 

Defendant from violating Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)] and Section 

10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-

5]. 

III. 

 Ordering Defendant to pay a civil penalty pursuant to Section 20(d) of the Securities Act 

[15 U.S.C. § 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]. 

IV. 

 Permanently barring Defendant from participating in any offering of municipal securities, 

including engaging in activities with a broker, dealer, or issuer for purposes of issuing, trading, or 

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inducing or attempting to induce the purchase or sale of any municipal security, provided however, 

that such injunction shall not prevent Defendant from purchasing or selling municipal securities 

for her own personal account. 

V. 

 Retaining jurisdiction over this action to implement and carry out the terms of all orders 

and decrees that may be entered, or to entertain any suitable application or motion for additional 

relief within the jurisdiction of this Court. 

VI. 

 Granting such other and further relief as this Court deems just and appropriate. 

Dated:  March 16, 2022 

       Respectfully submitted, 

        
___________________________ 
Matthew J. Gulde 
Illinois Bar No. 6272325 
SDTX Bar No. 1821299  
United States Securities and  
Exchange Commission 
Burnett Plaza, Suite 1900 
801 Cherry Street, Unit 18 
Fort Worth, TX  76102 
Telephone:  (817) 978-1410 
Facsimile:  (817) 978-4927 
[email protected] 

 
Attorney for Plaintiff United States 
Securities and Exchange Commission 

 
 
 

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