On May 6 the Securities and Exchange Commission brought a 21C order against the city of Harrisburg, PA for disclosure violations under the federal securities laws. A 21C action is a civil penalty designed to both publicly shame the offending party and put other, similarly situated parties on notice that the SEC is on the look-out for violators.
Harrisburg’s violations included sins of omission as well as sins of commission:
This matter involves Harrisburg’s violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in connection with material misstatements and omissions made by Harrisburg in its public statements and financial information, during a multi-year period where the
City also failed to comply with written undertakings executed by the City in the form of Continuing Disclosure Certificates (“Continuing Disclosure Certificates”). . . . Pursuant to the Continuing Disclosure Certificates, the City agreed to provide certain ongoing financial information and notices for the benefit of bondholders. Harrisburg is a near-bankrupt city under state receivership largely by virtue of approximately $260 million in outstanding debt it guaranteed for upgrades and repairs to a municipal Resource Recovery Facility (“RRF”), owned by The Harrisburg Authority (“Authority”).
For over two years, from January 2009 through March 2011 (the “relevant time period”), because Harrisburg did not submit annual financial information, audited financial statements, notices of failure to provide required annual financial information and notices of material events (“financial information and notices”) pursuant to its Continuing Disclosure
Certificates, Harrisburg’s financial information and notices available to the market were incomplete and outdated. During the relevant time period, Harrisburg’s most recent annual financial information that was publicly available was for its year ended December 31, 2008. That document,
issued almost a year later on December 23, 2009, contained material misrepresentations and omissions regarding Harrisburg’s financial condition and its credit ratings. As a result of Harrisburg’s multi-year failure to provide financial information and notices as Harrisburg had agreed pursuant to its Continuing Disclosure Certificates, investors and the trading markets did not have certain information regarding the City’s financial condition and had to seek out other public statements made by Harrisburg for current information on the City’s finances. Those public statements misrepresented and omitted to state material information regarding Harrisburg’s deteriorating financial condition and credit ratings downgrades resulting from the RRF debt guarantees.
The SEC also focused on a statement by Harrisburg’s mayor in the annual “State of the City” address:
In the 2009 Address, the former Mayor only discussed the RRF as a situation that was an “additional challenge” and an “issue that can be resolved.” The 2009 address was misleading because it omitted to state the amount of RRF debt the City would likely have to repay from its General Fund, and the impact that repayment obligation was already having on Harrisburg’s finances.
The Harrisburg case is part of a (small) trend in which the SEC is looking more seriously at states’ and municipalities’ disclosures in muni offerings: Illinois in March 2013, New Jersey in August 2010, and now Harrisburg.
The SEC’s action caught the attention of the State Auditor of Ohio, Dave Yost, who gives good advice to all municipality and state issuers. Gongwer News Service reports:
Auditor Dave Yost on Tuesday issued a letter to Ohio local governments advising them to be accurate and forthcoming about financial statements after the Securities and Exchange Commission charged a Pennsylvania town with fraud.
Mr. Yost’s letter references actions by SEC against Harrisburg, Pa., for violations of the Securities and Exchange Act of 1934, which came with fines and a cease-and-desist order.
“All issuers of municipal debt in Ohio should pay close attention to this case,” he wrote. “For the first time, the SEC cited public utterances by a politician – notably the State of the City speech by the mayor – as contributing to the city’s misrepresentation of its financial condition.”
“Although such ‘spin’ may be considered acceptable in political circles, the SEC’s ruling yesterday makes it clear that it may be evidence of a material misrepresentation when it comes to financial reporting.”
Mr. Yost said he suggests all local communications about the municipalities’ financial condition be carefully scrutinized for “accuracy and candor.” Harrisburg was faulted for its failure to submit timely and accurate annual financial information, audited financial statements and notices required by its Continuing Disclosure Certificates regarding its bonded debt.