The SEC Action Against the City of Harrisburg: Lessons for Other Municipalities

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The Securities and Exchange Commission ("SEC") recently announced that it has charged the City of Harrisburg with violations of various anti-fraud provisions of federal securities laws in connection with the resource recovery facility and other outstanding municipal bonds issued or guaranteed by the City.  The City has accepted a settlement of the charges in which it agreed to correct the issues prospectively without payment of any monetary penalties.  Other municipalities and their elected officials should take notice of the grounds for the SEC’s charges: the City's failure to meet its post-issuance continuing disclosure responsibilities and the misleading public statements made by the City's elected officials.  In light of these events, municipalities should revisit their continuing disclosure compliance plans and ensure that their elected officials are aware of their responsibilities under federal securities laws.

Post-issuance compliance has been the subject of heightened SEC scrutiny over the last few years.  The SEC’s interest in compliance with continuing disclosure obligations specifically stems from its duty to ensure that secondary-market investors (i.e., investors purchasing municipal bonds from other investors following the initial sale of the bonds) have the necessary information to evaluate a prospective investment.  For secondary-market investors, perhaps the easiest way to evaluate an investment is to have access to current financial statements, which serve to evidence the financial health of the municipality that issued or guaranteed the bonds.  The City of Harrisburg’s problems with the SEC can be traced to the City’s failure to timely and accurately prepare such financial statements in compliance with its continuing disclosure obligations.

In its announcement, the SEC noted that, until recently, the most current publicly available financial report provided by the City was from 2008, and that this report omitted or misstated material information about the City’s financial condition.  The SEC also noted that the City failed to file annual financial reports from January 2009 through March 2011, and therefore, updated City financial information was not available to secondary-market investors. 

With minimal public information about the City’s finances available, the SEC determined that secondary-market investors would have to identify other sources of information concerning the City, including public statements made by City officials.  Under these circumstances, the City had an obligation to ensure that such information did not contain false or misleading statements about the City’s finances.  The SEC noted several instances in which such public statements made by the City contained false or misleading statements.  Among the information noted by the SEC was a 2009 “State of the City” address made by former Mayor Stephen Reed, as well as budget documents and mid-year fiscal reports.

The evaluation by the SEC of elected officials’ public statements and other publicly available information, under the circumstances described in its announcement, should demonstrate to municipalities, particularly those facing fiscal challenges, the importance of complying with continuing disclosure obligations, as failure to do so may invite SEC scrutiny of other publicly available information which may not have been prepared by competent professionals.  SEC review of public speeches by elected officials, such as a “State of the City” address, is especially troubling, as such speeches are inherently political in nature and often are not intended to communicate financial information in a fashion to be relied upon by secondary-market investors.  Municipalities should therefore take care to adopt a robust continuing disclosure compliance plan, designate responsible municipal officers or employees to carry out the plan, provide necessary training to those officers and employees, and engage professionals to assist as necessary.

 

Topics:  Civil Monetary Penalty, Disclosure Requirements, Financial Statements, Misleading Statements, Municipalities, SEC

Published In: Business Torts Updates, Elections & Politics Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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