The Birmingham Water Works has been had.

The agency's pension fund was bilked out of $4.3 million in a 2014 "Ponzi-style" scheme tied to a sketchy bond deal that cheated the issuer - the Oglala Sioux Indian tribe - as well as unwitting investors like Birmingham.

Proceeds from the deal - called a "sham" by the Securities and Exchange Commission -- were used to fund the lavish lifestyles of a group of New York serial financial scofflaws.

The water works has been advised by its own lawyers that it may never get the money back, according to documents obtained by AL.com this week. It has hired an outside attorney to try to recoup what it can.

Oh, the Water Works was had. But not as much as its employees. For it is their pension fund that has been put at risk.

The Water Board was notified of the loss a year ago in a memo from its lawyers, who described how the pension money was invested in a Wakpamni tribal economic development bond in August 2014.

"It is likely that the Wakpamni Bond investors have been the victim of significant Ponzi-style securities fraud," the memo to board members reads. "Immediate action is recommended to secure whatever assets might be available to recover the anticipated losses and to otherwise preserve our claims."

The investment appears to have violated several water works policies. The tribal bond was neither a rated security nor marketable, but the written investment policy requires that securities be marketable and of investment grade, and the underlying issuer must have at least an "A" rating.

Mac Underwood, the water works general manager, did not immediately respond to questions about the decision.

Jason Galanis has been called an "inveterate white collar fraudster."

Lawyer Clay Ragsdale, who has been hired to attempt to recover the losses, said he was instructed to let Water Board attorney Mark Parnell speak on the issue.

Parnell said the water works is considering legal action, so he is limited in what he can say. He did say the Water Works Board Pension Plan is "sound financially and funded comparable to most State of Alabama and local pension plans." The pension plan has about $130 million invested, he said.

Parnell said employees have been made aware of the loss.

It is unclear who is to blame for the investment failure, for trusting a scheme the Securities and Exchange Commission branded as "brazen" and "cold and calculated."

Birmingham was certainly not the only victim of the scam. Much can be learned from simply tracking the case itself, from South Dakota to New York and to the Cayman Islands.

The SEC argued in a complaint last year that the deal was put together by Jason Galanis and his father, John, part of a New York family that had run into legal trouble in the past. They assembled a group that exploited the tribe, swindled investors and spent much of the money. The SEC claims the two Galanis men spent it on shopping sprees, to expand their corporate empire and to pay the lawyers who had to defend them in another fraud case.

It all began in March of 2014, when the Galanis family convinced the Wakpamni Lake Community Corporation - a tribe in South Dakota, in one of America's poorest regions -- to issue the limited recourse bonds.

The way they got into Birmingham at all was tricky. Because it had to be.

Because of previous brushes with the law and the SEC - Jason Galanis had been implicated in accounting fraud at Penthouse International, the company that published Penthouse Magazine -- he couldn't simply run a securities firm. He was barred from doing that.

So Galanis had to buy one and set up others to run it. He had to hide his own involvement, according to the charges against him. And that's exactly what he did.

His group, according to the SEC, in May of 2014 arranged to buy Hughes Capital Management, which had worked with the Birmingham Water Works since 2002 and had long held the ear of water works management and board members. Hughes, run by Frankie Hughes until that sale, had served as investment advisor with full investment authority over the pension plan.

It was perfect.

Galanis bought Hughes and merged it with two other companies, ultimately becoming Atlantic Asset Management as a way to conceal his involvement.

Galanis obtained undisclosed control over those companies - and the client funds they managed -- as he convinced the tribe to issue the bonds. He set up officers to buy $43 million in bonds using clients' money, and spent it as he pleased.

Instead of investing the money as promised, the cash wound up in a bank account in Florida belonging to a company controlled by Galanis and his pals. It was spent at places like Valentino, Yves Saint Laurent, Barney's, Prada and Gucci. Investor money was also used to pay the lawyers who defended Jason and John Galanis from other charges.

The memo to board members last year described how the investors' money, "after paying huge fees to the investment advisors and placement agents," was used to buy a British Virgin Islands annuity controlled by one of Galanis' co-defendants. The annuity invested the money in an insurance company in the Caymans.

In the end they cheated both the tribe and the investors.

Andrew M. Calamari, Regional Director of the SEC's New York office, described it like this last May, when Galanis, his father and five others were charged with defrauding the investors:

"We allege that Jason Galanis and his associates embarked upon a brazen and complex scheme in cold and calculated fashion to steal millions of dollars from unwitting investors ... Galanis persisted in this alleged scheme even after he was arrested by criminal authorities and charged by the SEC in a different case."

Galanis pleaded guilty in January of this year. He was ordered to repay $43 million, but it is unclear if that will happen. Atlantic Asset Management was placed in receivership.

The question of who is to blame in Birmingham - besides Galanis and his crooks -- is another matter. Some point at water works management, that should have been aware of the Hughes sale and should have been more vigilant.

Some board members have questioned Renasant Bank, which in 2013 was hired by the water works to serve as trustee and investment advisor, and held that position until this year.

All have been tight-lipped about the fraud, and slow to answer questions. Attempts to reach those at Renasant with knowledge of the deal failed.

Parnell, however, said Hughes Capital Management/Atlantic Asset "made the decision to invest funds in the Wakpamni bond and did not follow the IPS (Investment Policy Statement)."

It is hard, when all has been handled in executive sessions and in the dark, to know. The memo revealing the loss to the board last year also said the bonds were invested at the direction of Hughes. Apparently after the sale to Galanis' group.

In a water works finance committee meeting last March, Todd Golden and Matthew Foster of Renasant Wealth Management described their role since taking over Jan. 1, 2016 from Hughes Capital Management and Atlantic Asset Management, according to minutes of that meeting.

Golden assured board members then that Renasant "does not purchase BBB securities, wherein Atlantic Asset chose to do so," the minutes read.

"Renasant has an internal policy of only buying bonds that are rated 'A' or higher, wherein Atlantic Asset allowed more latitude as they made bond purchases that were rated 'BBB.'"

An awful lot of questions remain. An awful lot of secrecy has been carried out.

Securities and Exchange Commission complaint against Jason Galanis by John Archibald on Scribd

Jason Galanis Complaint by John Archibald on Scribd