Underwriter Abuses are Plentiful in the Municipal Bond Markets


Firms that underwrite municipal bonds often gain advantage over municipalities by engaging in unlawful acts that sometimes may rise to the level of criminal activity. Public officials are, by and large, not savvy municipal bond financiers. They usually rely on the expertise of underwriters, who often take unfair advantage of municipalities, public officials and taxpayers (to put it delicately).

The SEC, which is charged with protecting both purchasers and sellers of securities from deceptive practices, has lacked the resources to adequately enforce existing laws and rules on behalf of issuers against underwriter firms. The municipal bond market is very large and very important, according to New York Times columnist Gretchen Morgenson, and more oversight and protection is needed (“Police Protection, Please, for Municipal Bonds”).

Several cases that the SEC has brought show the seamy underbelly of the municipal bond market. In 2009, JP Morgan Securities agreed to pay $50 million to Jefferson County, Alabama and to disgorge over $647 million in ill-gotten fees associated with a municipal bond deal in which it allegedly bribed friends of county commissioners to rig the bidding for bond offerings and engage in related swap transactions that landed Jefferson County in bankruptcy.

In another SEC case, Stifel, Nicolaus and the Royal Bank of Canada paid $30.4 million to settle allegations that they sold unsuitably complex financial products to a number of Wisconsin school districts whose officials did understand interest rate swaps.

Similarly, in an enforcement action brought by the State of New Hampshire, UBS allegedly committed fraud in underwriting auction-rate securities for the state’s Higher Education Loan Corporation, its student loan corporation. UBS allegedly knew that the auction rate market was on the verge of collapse but did nothing to warn the student loan corporation or disclose that it was propping up the market and would soon stop propping it up. The student loan corporation issued $1.5 billion in securities, before the collapse.

The SEC says it believes that it has an equal obligation to protect municipal bond issuers from the deceptive practices of underwriter firms. “It has and continues to be on our radar in terms of whether you have municipalities that were sold these complex products without fully understanding the risks that were entailed or the fees that were involved,” Elaine C. Greenberg, chief of the S.E.C. enforcement division’s municipal securities and public pensions unit, was quoted as saying.

But “[s]o far, the commission’s reticence to act on behalf of municipal issuers has left those issuers to take on Wall Street alone,” writes Ms. Morgenson, and various statutes of limitations are close to running out on credit crisis era cases.

J. Boyd Page, an Atlanta attorney that represents investors, observed, “Victimized state and local governments would be well-advised to act promptly to protect their residents and taxpayers. With due respect to government servants, in most cases, they often lack the resources to investigate and identify the risks of the varied complex instruments and strategies that are recommended to municipalities. These public officials are often forced to trust the honesty and integrity of their financial advisers, and that trust has been betrayed in many cases.”

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.