SEC Assesses Its First Financial Penalty against a Municipal Securities Issuer

by Ballard Spahr LLP

The Securities and Exchange Commission (SEC) announced yesterday that it has, for the first time, assessed a financial penalty against a municipal securities issuer. The penalty arises from a settled administrative proceeding charging the issuer with negligently misleading investors in a bond offering that financed the construction of a regional events center and ice hockey arena. Although it typically is hesitant to impose penalties on municipal issuers that will affect taxpayers, the SEC appears confident that the issuer can pay the penalty without taxpayer assistance. Yesterday’s settlement also is notable for the wide scope of transaction participants sanctioned.

The SEC’s charges arose from a $41.77 million offering of Bond Anticipation Notes (BANs) by the Greater Wenatchee Regional Events Center Public Facilities District (District) in 2008. The BANs were to mature in 2011, with the principal to be repaid solely through the issuance of long-term bonds. By 2011, however, the District was unable to issue long-term refunding bonds, and consequently defaulted on the BANs. This occurred for two reasons: the events center’s revenue was insufficient to support a long-term take-out financing, and the District’s ability to issue long-term debt was constrained by the City of Wenatchee’s legal debt capacity of $19.3 million.

Before the 2008 offering, the District hired an outside developer to develop and operate the events center. Over the course of the development and construction of the events center, the developer prepared a series of financial projections to be used both for budgeting purposes and for inclusion in the District’s Official Statement accompanying the BANs. An independent consultant reviewing the developer’s first two sets of projections, however, identified errors with the projections and raised concerns about the events center’s economic viability.

The developer subsequently produced a new set of projections, which were not reviewed by the independent consultant, according to the SEC’s Order. After reviewing the new projections, the former Mayor of the City of Wenatchee and a senior staff member urged the developer to include more optimistic numbers in its projections, arguing that they were confident that the local citizens would support the events center. The developer then provided a set of revised projections, which were included in the Official Statement for the BANs.

According to the SEC, the Official Statement was materially false and misleading on several fronts: 

  • It failed to warn investors that the District’s obligation to pay off the BANs could be constrained by the City’s debt limit.
  • It wrongly stated there had been no independent reviews of the financial projections for the events center, when in fact, an independent consultant had examined the projections twice and questioned the project’s economic viability.
  • It failed to inform investors that the Mayor and the senior staffer had influenced the financial projections, rendering them unduly optimistic.

The District agreed to pay a $20,000 penalty and undertake remedial actions to settle the SEC’s charges. The SEC believes the penalty can be paid from the events center’s operating fund without directly affecting District taxpayers.

In addition to the District, the SEC’s settled proceedings also name the developer and its then-CEO, the underwriter and its lead investment banker, and the District’s senior staff member who certified the accuracy of the Official Statement. The SEC’s decision to charge underwriters, public officials, and other professionals in these proceedings continues to emphasize that it will hold such individuals accountable for misleading statements in primary disclosure documents.

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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