Enforcement Actions:City Settles with Securities and Exchange Commission for Bond Violations

By Seth Daniel

The federal Securities and Exchange Commission (SEC) last week announced enforcement actions against 71 municipal issuers and other obligated persons across the country for violations in municipal bond offerings, with the only Massachusetts violator being the City of Chelsea for making false statements in three recent bond offerings.

The actions were brought under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, a voluntary self-reporting program targeting material misstatements and omissions in municipal bond offering documents. The initiative offered favorable settlement terms to municipal bond underwriters, issuers, and obligated persons that self-reported certain violations of the federal securities laws. Chelsea self-reported its misstatements and has been working favorably with SEC investigators.

No one form the City was immediately available to discuss the settlement, which did not involve any cash penalties.

In the City’s case, on three occasions – in 2012, 2013 and 2014 – during competitive offerings the City indicated it had never failed to comply in providing financial reports on its bond offerings and that was not the case.

In 2012, the statement was false because the City had failed to file its 2007 audited financial report until it was 15 months late and failed to file both its annual financial statement and its audited financials for fiscal year 2010.

In 2013, the statement was false because the City had failed to file its audited financial statement and its audited financials for fiscal year 2010 by the time of the 2013 bond offering, though it was due beforehand.

In 2014, the statement was false because the City filed its annual financial statement and its audited financials for fiscal year 2010, 34 months late, and just prior to the offering.

“Respondent knew or should have known that these statements were untrue,” read the complaint by the SEC against the City.

Chelsea was not alone in the matter nationwide.

The SEC found that from 2011 to 2014, the 71 issuers and obligated persons sold municipal bonds using offering documents that contained materially false statements or omissions about their compliance with continuing disclosure obligations.  Continuing disclosure provides municipal bond investors with important information, including annual financial reports, on an ongoing basis.  The SEC’s 2012 Municipal Market Report identified issuers’ failure to comply with their continuing disclosure obligations as a major challenge for investors seeking information about their municipal bond holdings.

“The diversity among the 71 entities in these actions demonstrates that continuing disclosure failures were a widespread and pervasive problem in the municipal bond market,” said Andrew Ceresney, Director of the SEC Enforcement Division. “The MCDC Initiative has brought attention to this important issue and resulted in increased compliance by municipal issuers and underwriters.”

The parties, including Chelsea, settled the actions without admitting or denying the findings and agreed to cease and desist from future violations.  Pursuant to the terms of the initiative, they also agreed to undertake to establish appropriate policies, procedures, and training regarding continuing disclosure obligations; comply with existing continuing disclosure undertakings, including updating past delinquent filings, disclose the settlement in future offering documents, and cooperate with any subsequent investigations by the SEC.

“The terms of the settlements reflect the credit these issuers earned for their cooperation in self-reporting pursuant to the MCDC initiative,” said LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Public Finance Abuse Unit.  “Because the issuers also voluntarily agreed to take steps to prevent future violations, both they and their investors have benefited from the initiative.”

The SEC has now filed a total of 143 actions against 144 respondents as part of the MCDC Initiative. Last week’s actions are the first against municipal issuers since the first action under the initiative was announced in July 2014 against a California school district.

Leave a Reply

Your email address will not be published.