Summary
For the first time, the Securities and Exchange Commission has charged a municipality with securities fraud for misleading statements made outside of the municipality's securities disclosure documents. In a report accompanying the release of the charges, the SEC cautioned other public officials that liability could arise for statements that are reasonably expected to reach the investor marketplace, even if not connected to any particular securities offering.
On May 6, 2013, the Securities and Exchange Commission ("SEC") charged a northeastern city (the "City") with securities fraud for misleading statements by City officials that were made available to the public on the City's website. These statements were made during a period of time when the City's financial condition was deteriorating and the financial information available to municipal bond investors was either incomplete or outdated. This is the first time that the SEC has charged a municipal bond issuer with securities fraud for statements made outside of the issuer's securities disclosure documents. The SEC explained that its decision to charge the City for these statements was influenced by the City's failure to make its required continuing disclosure filings with the Electronic Municipal Market Access system ("EMMA") (the central repository for information disclosures by municipal bond issuers). By not providing updated financial information to the EMMA website, the City created a risk that investors could purchase or sell securities issued or guaranteed by the City in the secondary market on the basis of incomplete and outdated information, or look to other sources of information supplied by the City, including the City's website.
The City and the SEC agreed to settle the charges. In doing so, the City neither admitted nor denied any wrongdoing, but agreed to cease and desist from further violations. The SEC indicated that, in accepting the settlement, it took into account the City's cooperation with the investigation and the steps it has taken to improve its disclosure process. In the settlement, the SEC stated the following regarding a municipal issuer's obligations for information that is released to the public:
"Municipal issuers have an obligation to make sure that information that is released to the public that is reasonably expected to reach investors and the trading markets, even if not specifically published for that purpose, does not violate the antifraud provisions . . . . Since access by market participants to current and reliable information is uneven and inefficient, municipal issuers presently face a risk of misleading investors through public statements that may not be intended to be the basis of investment decisions, but nevertheless may be reasonably expected to reach the securities markets."
In a release accompanying the settlement, the SEC advised that statements made by public officials who may be viewed as having knowledge of the financial condition and operations of an issuer should be carefully evaluated to ensure that they are not materially false or misleading. The SEC encouraged municipal issuers to:
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adopt policies and procedures that are reasonably designed to result in accurate, timely and complete public disclosure
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identify those persons involved in the disclosure process
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evaluate other public disclosures that have been made by the issuer prior to the public dissemination of additional information
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assure that responsible individuals receive adequate training about their obligations under federal securities laws.
The SEC also advised that failure to comply with ongoing disclosure obligations may increase the risk that public statements by officials may be misleading or omit material information.
For more information regarding the federal securities laws that apply to municipal bond issuers, or for help developing policies and procedures to ensure compliance with these laws, please contact George T. Magnatta (215-972-7126, gmagnatta@saul.com), Chair of the Public Finance Practice, Michael C. Barnes (215-972-7188, mbarnes@saul.com) or any other member of the Public Finance Practice.
