City Charged with Securities Fraud

May 11th, 2013
in econ_news, syndication

Econintersect:  Harrisburg, PA has been charged by the SEC (Securities and Exchange Commission) with making misleading public statements in the city’s budget report, annual and midyear financial statements in the time period (2009-2011) before the city went under state receivership.  The city is essentially bankrupt, unable to meet operating and debt service payments.  According  Marlene Y. Satter, AdvisorOne, the city is delinquent on approximately $13.9 million in general obligation debt service payments.  The biggest albatross for Harrisburg is the municipal recylcing plant pictured below, picture from AdvisorOne.


Follow up:

According to AdvisorOne, this is the first ever action for the SEC against a municipality other than for statements in its securities disclosure documents.  The inference of the charges is that Harrisburg officials undertook a comprehensive campaign to provide misleading statements and omissions across many fronts.

From the report on this matter issued by the SEC:

In this case, among other things, public officials who worked within the City’s administration (“City Administrators”) publicly released statements and financial information that omitted or misstated material information about Harrisburg’s financial condition, including its credit ratings and payments made by the City on debt it guaranteed for a resource recovery facility. The financial information and other statements, publicly available on Harrisburg’s website at the time, included the City’s 2007 and 2008 Comprehensive Annual Financial Reports (“CAFR”), 2009 Budget and Transmittal Letter, 2009 State of the City Address and its Mid-Year Fiscal Report for 2009. For example, City Administrators submitted Harrisburg’s 2008 CAFR, which omitted to include a downgrade by Moody’s Investor Services, Inc. of the City’s general obligation debt from Baa2 to Ba2. City Administrators also released a 2009 Budget that did not include funds for debt guarantee payments for the resource recovery facility, although $2.1 million had informally been set aside in anticipation of having to make those payments. In another instance, City Administrators released a Mid-Year Fiscal Report for 2009 without reference to the $2.3 million in guarantee payments made by the City for a resource recovery facility. In addition, an annual public address given by a Harrisburg public official omitted to state the amount of resource recovery facility debt the City would likely have to repay from its General Fund, and the impact the repayment was having on Harrisburg’s finances. Harrisburg public officials failed to take measures, appropriate under the circumstances, to ensure that their financial information and other statements were not materially misleading.

The misstatements and omissions in this case were not the result of an isolated incident but were recurrent and stretched from one fiscal year into the next. From January 2009 through March 2011, at a time of increased public interest in Harrisburg’s financial condition, and despite having entered into multiple written undertakings, Harrisburg failed to submit annual financial information, audited financial statements, notices of failure to provide required annual financial information and material event notices. Investors may be more likely to rely upon statements from public officials where written undertakings made pursuant to Rule 15c2-12 have not been fulfilled and required continuing disclosures are not available through the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (“EMMA”) system.

On 06 May 2013 the SEC issued a cease and desist order which was agreed to by Harrisburg.  The SEC acknowledged the cooperation of the city in their investigation.  The order specifies a requirement for Harrisburg to institute formal written policies and procedures with respect to public statements regarding financial information made by the City, along with additional requirements to assure compliance with securities laws.


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