SEC Fraud Charges Against Harrisburg, Pa, Send Warning to All Municipalities

“What we’ve got here is failure to communicate” (The Captain, Cool Hand Luke)

Earlier this month, the Securities and Exchange Commission charged Harrisburg, Pennsylvania, with securities fraud for public statements made by municipal officials. Attorneys Robert Feyer and Todd Scott of Orrick explain:

“… the SEC found that the City had violated the securities laws through public statements made by public officials, as well as budget documents released during a certain time period, which allegedly failed to disclose material information about the City’s dire financial condition. The reason these statements were deemed so significant is that during this period the City had fallen far behind in releasing its Comprehensive Annual Financial Reports (“CAFRs”), so that investors had no other available current financial information.”

It’s the first time the SEC has charged a municipality with fraud for misleading statements, write Michael Barnes and George Magnatta of law firm Saul Ewing, and it sends a strong message to all cities – and public officials – to mind their communications:

“In a release accompanying the settlement, the SEC advised that statements made by public officials who may be viewed as having knowledge of the financial condition and operations of an issuer should be carefully evaluated to ensure that they are not materially false or misleading.”

Three ways to do that:

1. Tell the full story (especially when the going gets tough):

Stephen Quinlivan (Leonard, Street and Deinard): “When a municipal entity is faced with deteriorating health, investors of the municipality’s obligations may well look to written and oral information provided by public officials. If the municipality is not providing complete and accurate information, the lack of disclosures may increase the risk that municipal officials’ public statements may be misleading or may omit material information.”

2. Adopt and follow a written policy:

William Rhodes and Tesia Stanley (Ballard Spahr LLP): “In addition, the SEC’s order highlights the importance of municipal securities issuers’ adoption of written policies and procedures to ensure proper communication with the investment community.”

3. Don’t ignore reporting requirements:

Kimberly Byrens (Best Best & Krieger): “The charges set a precedent for all municipalities required to disclose material market data, including yearly budgets and comprehensive financial reports, on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system.”

The updates:

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