SANTA FE, N.M. (AP) — The current chief operating officer and a former controller at the New Mexico Finance Authority were arrested Wednesday on charges of state securities violations related to a fake audit that made the agency's revenue look stronger.

The Securities Division of New Mexico's Regulation and Licensing Department announced the arrests Wednesday of COO John Duff and former controller Greg Campbell, who left the agency in June.

The Finance Authority issues bonds and provides low-cost financing for capital projects by certain state agencies, cities, counties, schools and other New Mexico governmental organizations. The authority has more than $1 billion in outstanding loans.

Among the charges is that the two men agreed to an accounting change that made the authority's revenue appear greater than what it actually was in 2011.

According to the criminal complaint, Campbell faces securities fraud, forgery and racketeering charges. Investigators say Campbell has acknowledged that he forged the agency's audit report that provides financial statements about the agency and he falsely claimed that it had been audited by an outside firm.

Duff was charged as an accessory on eight counts of securities fraud and racketeering. Duff, who was Campbell's immediate supervisor, also has been charged with conspiring to engage in a pattern of racketeering by misrepresenting NMFA's financial statements to ratings agencies, investors that buy the agency's bonds, and the state.

The state's top securities regulator declined to speculate Wednesday on the motives of Campbell and Duff, and the finance authority's governing board members say it's uncertain whether any money is missing until a forensic audit of the agency is completed.

An arrest warrant affidavit by a state securities regulator said Campbell, with the knowledge and permission of Duff, misrepresented about $40 million in NMFA's 2011 financial statements. At issue is money the authority provided to state government in 2010 and 2011 to plug shortfalls in New Mexico's operating budget for schools and general government programs. The authority receives a share of state tax revenues, and the Legislature tapped into idle funds held by agencies to help balance the state budget.

Instead of reporting the transfer of money as a $40 million revenue decline, the authority officials classified it as a "grant expense" in the fake audit. Regulators say that was improper.

"These two corporate officials had strong accounting backgrounds, yet they cooked the books to make their financial statements look stronger than they actually were," Daniel Tanaka, director of the Securities Division, said in a statement.

After a NMFA board meeting, Tanaka told reporters: "We have no reason to believe that the NMFA is in fiscal trouble at this point. But certainly steps were taken to falsely represent the financial condition and to make it appear stronger than it was."

The affidavit said the accounting reclassification of the transferred money was outlined to the board by Campbell during an August 2011 meeting and no questions were raised.

Duff has worked for the finance authority since 2005, starting as its chief investment officer. As chief operating officer, he supervised the accounting operations that Campbell headed as controller. Campbell also went to work for the authority in 2005 to perform accounting work and became controller in December 2007.

Campbell and Duff were booked into Santa Fe County Jail and were subject to a $20,000 cash or surety bond. Both men were released Wednesday afternoon, according to jail records.

A date for an arraignment at the First Judicial District Court in Santa Fe had not yet been set.

"The action of these two individuals has risked the credit rating of New Mexico," said J. Dee Dennis Jr., Superintendent of the State Regulation and Licensing Department. "We want to send a clear and strong message to Wall Street, rating agencies, bond purchasers and investors that we will get to the bottom of this as quickly as possible to once again restore their confidence in our state."

National credit rating agencies have said they're considering whether to downgrade the authority's bond ratings because of concerns about a lack of financial oversight within the organization. A drop in bond ratings will increase the cost to New Mexico taxpayers for governments to finance capital improvement projects.

Without audited financial statements, the authority is unable to issue new bonds, and its governing board has decided to temporarily scale back lending to local governments while the agency resolves problems stemming from the fake audit.

The authority's governing board voted Wednesday to limit low-cost loans that it provides to cities, counties and other local governments for projects such as sewers, government buildings, water rights acquisition and equipment including fire trucks.

The authority can make loans using $37 million in cash reserves, and the board is imposing a $5 million limit on loans for new projects.

The authority was created by the Legislature and receives about $26 million a year in tax revenues for its financing. Its workers and management are not state employees, but there is government oversight of its operations. The authority is governed by a 12-member board, and a majority of the members are the governor's appointees and members of the governor's administration.


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