The municipal bond industry took notice of enforcement actions of the Securities and Exchange Commission (SEC) announced on November 6, 2014. These were separate settlements of SEC securities fraud charges against a Michigan city and two of its former officials individually, based on allegedly false and misleading statements in bond offering documents in 2009-2010.
These SEC actions have important ramifications for all government officials and staff responsible for municipal bond disclosure documents. Most notably, this includes the SEC’s first-ever civil penalty against an elected municipal official as a “control person” for securities law violations under the Dodd-Frank Act of 2010. The key elements of the settlements are described below.
Without admitting or denying liability and without any financial penalty or fine, a Michigan city agreed to cease and desist from future violations of the federal antifraud securities laws and agreed to implement remedial measures that included adopting disclosure policies and procedures drafted by disclosure counsel and designating disclosure counsel responsible for training all personnel involved in the city’s bond offering and disclosure process.
Without admitting or denying liability, a former mayor and former city administrator of the city each agreed to be permanently barred from participating in any bond offerings and to cease and desist from future federal securities law violations. In an unprecedented enforcement action against a municipal official, the consent judgment against the former mayor imposed a $10,000 civil penalty against him personally. The SEC said this about the penalty (in its court brief described below):
“This enforcement action ... sets an important, new precedent. This is the first enforcement action in which the SEC has acted to hold an elected official responsible for violations, not based on his participation in those violations but rather on his ability to control other defendants who are charged with committing violations.”
The consent judgment against the city is fully in effect. However, the consent judgments against the former city officials were required to be entered by the federal court in Detroit, which had not yet occurred when this article was published. Rather, on November 7, 2014, U.S. District Judge Avern Cohn entered orders vacating those individual judgments, stating that the court should not approve a consent judgment without full knowledge of all of the relevant facts. Following a subsequent status conference in that court, the SEC on December 23, 2014 filed a brief in support of its motion for entry of both consent judgments against the individual defendants. A hearing is scheduled in both cases for January 28, 2015.