The inclusion of the public statements of an elected official in allegations of securities fraud could change the traditional relationship between the politicians and their constituency versus issuers and the bond market. Monday, Harrisburg, Pa. made history as the first municipality charged with securities fraud for misleading statements made outside of its securities disclosure. Pennsylvania’s capital, a distressed municipality currently in receivership, failed to provide continuing disclosure, including audited financial statements or material event notifications from 2009 to 2011. Harrisburg is also charged with making misleading statements about its downgraded credit rating and outstanding debt payments. The SEC claims that Harrisburg created an “information vacuum” forcing investors to rely on other public statements, including the Mayor’s State of the City address, which misrepresented the city’s finances.
The charges set a precedent for all municipalities required to disclose material market data, including yearly budgets and comprehensive financial reports, on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system. Under the Securities and Exchange Act of 1934, municipal issuers have an ongoing duty to provide accurate and timely public disclosures that inform the trading decisions of market investors. Any information “reasonably expected” to reach the securities market cannot be misleading, even if the statements are not “explicitly intended” for investors. Harrisburg’s adopted budget, posted on the city’s website and the former mayor’s 2009 State of the City address, allegedly fell under these criteria and drove investors to make decisions based on “inaccurate and stale” information. In the corporate sector, public statements by CEOs are often vetted by lawyers and accountants.
Rule 15c2-12 sets forth disclosure obligations relating to municipal issuers and is designed to provide accurate information to investors after bonds have been issued and to prevent fraudulent, deceptive or manipulative practices. The SEC’s investigation of Harrisburg focused on its failure to comply with its continuing disclosure requirement, misstatements regarding payment of $455 million in debt which it had guaranteed, and reference to this “additional challenge” as one that could be “resolved.” Harrisburg has not admitted or denied the SEC findings, but has agreed to desist from future violations and is cooperating with the Commission in taking steps to strengthen transparency. Issuers of public debt should be on notice that non-compliance with continuing disclosure requirements could create an environment in which the investment community relies on public statements.
For more information on this case or its implications for your agency, please contact Public Finance attorney Kim Byrens or your Best Best & Krieger attorney.