Types Of SEC Cases: Municipal Bond Fraud
Port Authority of NY/NJ Admits Municipal Bond FraudThe Port Authority of New York and New Jersey (“Port Authority”) admitted to wrongdoing related to a municipal bond fraud. It agreed to pay a fine of $400,000 to settle the charges with the U.S. Securities and Exchange Commission (“SEC”). Per the settlement, the Port Authority admitted that it knew about potential legal risks to certain roadway projects that it sought to fund. It nevertheless proceeded with $2.3 billion in bond offerings, without disclosing those risks to public investors.
One Element Of The Municipal Bond Fraud: Lack Of Project AuthorizationThe SEC found that the Port Authority sought to finance certain roadway projects that did not fall under its administrative jurisdiction and, therefore, may have been illegal for it to undertake. According to the SEC’s Order imposing sanctions, Port Authority chose to sell bonds to the public anyway, without disclosing the possible illegality.
Another Element Of The Municipal Bond Fraud: Omission Of RisksThe SEC’s Order found that the Port Authority held discussions about the issue in which it acknowledged the risks. Port Authority letters and memos showed that it knew about the problem. One memo from a Port Authority lawyer stated:
legislative authorization for Port Authority participation in the Projects is lacking.… [H]aving taken a closer look at the projects in question [referred to as “Pulaski Skyway, Route 139, Wittpenn Bridge and New Road”], there is no clear path to legislative authority to undertake such projects.Despite misgivings about the Roadway Projects from its own internal legal staff, the Port Authority proceeded with its plans. It offered and sold $2.3 billion worth of bonds to investors. Instead of disclosing the risks and/or potential conflicts, the bond offering documents explicitly stated that the Port Authority raised funds “only for purposes for which the Port Authority is authorized by law to issue bonds.” “The Port Authority represented to investors that it was authorized to issue bonds while not disclosing significant known risks that its actions were not legally permitted,” the Director of the SECʼs New York Regional Office said in a press release. “Municipal bond issuers must ensure that their disclosures are complete and accurate so that investors can make fully informed decisions about whether to invest.”
The First Admission Of Wrongdoing By A Municipality In An SEC CaseIn the Order, the Port Authority “acknowledges that its conduct violated the federal securities laws.” This was the first time that a municipal issuer admitted wrongdoing in an enforcement action brought by the SEC.
Whistleblowers Can Report A Municipal Bond Fraud To The SECThis case illustrates some types of misconduct that could give rise to SEC whistleblower cases if reported to the Commission through the SEC whistleblower program. The SEC has not made any public statement as to whether this case was itself an actual SEC whistleblower case. The SEC’s Office of the Whistleblower posts Notices of Covered Action (“NoCA”) for Commission actions where a final judgment or order results in monetary sanctions exceeding $1 million. However, the NoCA list does not disclose whether a particular Enforcement action was brought as the result of an SEC whistleblower case, tip, complaint, or referral being filed with the Commission.
Additional InformationFor more information about municipal bond fraud, click on the links below:
- The SEC’s Press Release announcing the settlement in the Port Authority case. (External link to the SEC’s website.)
- The SEC’s Order in SEC v The Port Authority Of New York And New Jersey. (External link to the SEC’s website.)
- Article about SEC v The Port Authority Of New York And New Jersey. (Note: external link to The Pickholz Law Offices website.)