SEC charges municipal bond issuer and underwriter with defrauding investors

by Saul Ewing Arnstein & Lehr LLP


For the first time, the Securities and Exchange Commission has charged a municipal bond issuer with securities fraud for falsely claiming that it was compliant with annual disclosure obligations. An underwriting firm along with a supervisor also were charged for failing to research the accuracy of the bond issuer’s claim. In a report accompanying the release of the charges, the SEC cautioned other municipal bond issuers and underwriters that it will be vigilant in making sure that municipal issuers and underwriters comply with disclosure obligations. Follow the links in this Alert to read more about the SEC charges.

On July 29, 2013, the Securities and Exchange Commission (“SEC”) charged a school district (the “School”) with securities fraud for falsely stating to bond investors that the School had been providing annual financial information and notices required as part of the School’s prior bond offerings. In an official statement prepared in 2007 for a bond offering on behalf of the School, there was a statement that the School was in compliance with its disclosure obligations related to prior bond offerings; however, the School had not submitted any of the required annual reports or notices for a 2005 bond offering. The official statement relating to the 2007 bond offering was disseminated to the public after the School signed a certificate and affidavit attesting that the official statement did not contain any untrue statement of material fact. Without admitting or denying the SEC’s findings, the School consented to an order to cease and desist from committing or causing any violations of relevant provisions of the federal securities laws. According to the SEC release, the School has undertaken remedial actions including:

  • the adoption of written policies for its continuing disclosure obligations;
  • the designation of an individual responsible for ensuring compliance with those obligations; and
  • the implementation of annual training for its personnel involved with bond offerings and disclosure representations.

In a separate order (the “Order”), the SEC charged the underwriting firm (the “Underwriter”) and a director of the Underwriter for violating federal securities law for their roles in the School transaction. The Order found that underwriters have a “heightened obligation” to take steps to ensure adequate disclosure in an offering document and that sole reliance on representations of the bond issuer will not be sufficient to avoid antifraud provisions of the federal securities law. The Order states that the Underwriter violated SEC Rule 15c2-12(c) for failing to have procedures and policies in place to ensure that the Underwriter would receive prompt notice of required disclosure submissions by the School. The Order charged a director of the Underwriter (the “Director”) for the misconduct involving the School disclosures.

The Underwriter consented to the Order, without admitting or denying the findings and to cease and desist from committing or causing any violations of relevant provisions of the federal securities laws. The Underwriter agreed to be censured and pay monetary damages. According to the SEC release, the Underwriter has taken a number of remedial actions to enhance its disclosure, including reviewing and amending policies and procedures as well as engaging independent compliance counsel.

The Director, without admitting or denying the findings, similarly consented to cease and desist from committing or causing any violations of relevant provisions of the federal securities laws. The Director agreed to pay monetary damages and is also subject to an investment company bar with the right to apply for reentry after one year; however, the Director is permanently barred from association in a supervisory capacity with any broker, dealer, investment adviser, municipal securities dealer, municipal adviser, transfer agent, or credit rating agency.

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, Chair of the Public Finance Practice, Joshua S. Pasker or any other member of the Public Finance Practice.

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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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