A Wake-up Call for Governments – The SEC Gets Personal About Disclosure
First came the warning in the City of Harrisburg, Pennsylvania matter, then came the Municipalities Continuing Disclosure Cooperative Initiative (“MCDC Initiative”). Now the Securities and Exchange Commission (“SEC”) has brought civil complaints against a city, its mayor and a city administrator, along with the pronouncement that the municipal market should expect increased attention from the SEC and that public officials could and would be held personally accountable for misleading or inaccurate statements made in connection with a public financing.
In 2013, the SEC charged the City of Harrisburg with securities fraud for misleading public statements made by its elected public officials when its financial condition was deteriorating and financial information available to municipal bond investors was either incomplete or outdated. The SEC found that misleading statements were made in the city’s budget report, annual and mid-year financial statements, and a State of the City address by the mayor. That action was the first time that the SEC had charged a municipality for misleading statements made outside of its securities disclosure documents. Harrisburg settled the charges.
The SEC found that Harrisburg failed to comply with requirements to provide certain ongoing financial information and audited financial statements for the benefit of investors holding hundreds of millions of dollars in bonds issued or guaranteed by the city. As a result of Harrisburg’s non-compliance from 2009 to 2011, investors had to seek out Harrisburg’s other public statements in order to obtain current information about the city’s finances. However, very little information about the city’s financial condition was publicly available at the time. The information that was accessible on the city’s website, such as its 2009 budget, 2009 State of the City address and 2009 mid-year fiscal report, either misstated or failed to disclose critical information about Harrisburg’s deteriorating financial condition and credit ratings.
In March of this year, the SEC announced the MCDC Initiative to address potential violations of the federal securities laws by municipal issuers, including obligated persons and underwriters of municipal securities, in connection with certain representations about continuing disclosures in bond offering documents. Under the MCDC Initiative, issuers and underwriters of municipal securities may choose to voluntarily report to the SEC materially-inaccurate statements made in offering documents concerning an issuer’s prior compliance with its continuing disclosure obligations.
Earlier this month, in its latest high-profile public finance enforcement action, the SEC announced fraud charges against the City of Allen Park, Michigan, and two of its former officials, the former city mayor and former city administrator. This is the first time the SEC has sought to impose “control person” liability on a mayor or any municipal official under Section 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”), which provides that a control person may be held jointly and severally liable for the securities law violations of the persons over which he or she exercises control.
Many in the municipal market believed that the SEC’s warning in the City of Harrisburg case was meant to apply going forward. However, the statements and omissions at issue in the City of Allen Park occurred in 2008 through 2010, at least three years before the City of Harrisburg case.
The City of Allen Park case demonstrates the SEC’s willingness to hold issuer officials personally accountable for material misstatements or omissions which are later determined to have been made in a manner reasonably calculated to influence the investing public. This means government issuers and their officials need to be aware of and understand the securities law implications of their statements and silence not only in formal disclosure documents but also outside of their disclosure documents such as in press releases, conversations with analysts, information meetings, official comments on budget negotiations and any other publicly-made statements.
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This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.