Two years ago, the Securities and Exchange Commission brought
its first-ever enforcement action against a state, accusing New
Jersey of deceiving municipal bond investors about the state's
unfunded pension liabilities. The case was a wake-up call.
Bloomberg predicted a wave of similar SEC suits against muni
bond issuers, the National Association of Bond Lawyers convened
a task force pension obligation disclosure, and the enforcement
bar braced for action.
And then ... nothing. Well, not exactly nothing. In October
2010 the SEC's municipal securities unit announced a settlement
with two officials from San Diego, in a case that dated back to
the commission's 2008 settlement with the city for
underreporting pension liability to bond investors. There were
reports of SEC investigations of bonds issued by the city of
Victorville, California, and of California's disclosure of
obligations to its gigantic public employees' pension fund. The
SEC also worked with the Justice Department on its municipal
bond bid-rigging case against several major banks, and reached
its own $51.2 million muni bond bid-rigging settlement with
JPMorgan Chase in 2011. But the expected wave of enforcement
actions didn't materialize. "Candidly, I expected to see a lot
more," said Thomas Gorman of Dorsey and Whitney, who writes the
SEC Actions blog. "These are complicated cases and they take a
long time, but it's been a while."
Wait no more. On Monday, the SEC sent a Wells Notice to Ivan
Harris of Morgan, Lewis & Bockius, who represents the city of
Miami. The letter confirmed that the SEC staff intends to
recommend civil charges of securities fraud and other disclosure
violations against the city. The letter does not specify that
the allegations relate to bond issues, but city officials
confirmed to The Miami Herald that the SEC has been
investigating its disclosure of budget manipulation to muni bond
investors.
According to the Herald, the SEC has been investigating
Miami's muni bond practices for 30 months, and continues to
investigate the financing of the Florida Marlins' baseball
stadium. The SEC's letter to the city invited Miami to make a
submission arguing why it should not be sued. Otherwise, the
letter said, "the staff may seek a permanent injunction, a civil
penalty and an order commanding the City of Miami to comply with
the Commission's prior cease-and-desist order."
Miami's lawyer, Morgan Lewis partner Harris, said the city
has not yet decided how it will respond to the Wells Notice.
"The city respectfully disagrees with the SEC but looks forward
to continuing the dialogue," Harris said, noting that Miami has
cooperated with the agency since the investigation began.
William Daly, the director of governmental affairs for the
National Association of Bond Lawyers, said the New Jersey case
made it clear that both the SEC and investors are scrutinizing
muni bond disclosures (though he said he hasn't heard about any
par t icular regulatory investigations). "There's a recognition in
the muni industry that (issuers and counsel) needed to look at
things carefully," he said. "There's been a lot of thinking
about what should go into disclosures." The latest guidelines
came in May from the NABL task force, which advised broad
disclosure of pension fund information.
An SEC spokesman didn't respond to an email request for
comment on the agency's progress in enforcing adequate muni bond
disclosure.
(Reporting by Alison Frankel)
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