Bloomberg is reporting that the SEC’s recent fraud action against the State of New Jersey may be the first of many such suits targeting public officials who raised money in the $2.8 trillion municipal bond market. New Jersey agreed to settle the fraud charges on August 18, 2010, the same day they were filed by the SEC.
“They will be looking for other cases,” James Doty, a former SEC general counsel, was quoted as saying. “It’s a harbinger that they expect disclosure standards to be scrutinized and be increased.”
“There are a lot of states that are significantly underfunded,” a former SEC chief accountant was quoted as saying. “There’s likely to be a dozen that have the same type of problems as New Jersey, and it’s not just states but cities too.”
Miami is reportedly in the SEC’s cross-hairs for omitting to disclose to investors that it used funds earmarked for capital projects to replenish its general fund in fiscal 2007 and 2008, according to the article.
The SEC reportedly began investigating New Jersey in 2007 following a New York Times article criticizing the state’s pension accounting. The SEC found the state failed to inform investors that $704 million represented as pension payments were actually transfers of money already in the retirement system, and also failed to disclose a $2.4 billion decline in value of pension fund assets, which “created the false impression” that the Teachers’ Pension and Annuity Fund and the Public Employees’ Retirement System were adequately funded.
Elaine Greenberg, head the SEC’s new municipal securities and public pensions unit and former SEC enforcement attorney, was quoted as saying: “We hope to alert other states and municipalities of their disclosure obligations under the federal securities laws as it pertains specifically to their pension fund liabilities,” Greenberg said in an interview, referring to the SEC’s New Jersey action. “The obligation is that the disclosure is current and is accurate.”
More disclosure rules are needed, however, according to Mary Shapiro, who heads the SEC. Since 1975, state and local bond issuers have not been required to file offering documents with the SEC or adhere to accounting standards, as public companies must. Any disclosure requirements are imposed on the banks that underwrite their securities. The SEC wants better disclosure rules, but the Dodd-Frank financial reform law calls for a two-year study into whether tougher disclosure is needed.
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