WASHINGTON — The Securities and Exchange Commission announced Monday it has charged the city of Harrisburg, Pa., with securities fraud for releasing misleading public information as the city’s financial condition deteriorated.
This is the first time that the SEC has charged a municipality for misleading statements made outside of its securities disclosure documents, the SEC said. Pennsylvania’s capital failed to properly disclose required information to the MSRB’s EMMA system, and also made misleading statements about its credit rating and debt payments, according to a cease-and-desist order filed by the SEC.
The city violated the Securities and Exchange Act of 1934 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, according to the SEC order.
Harrisburg is a distressed municipality that is currently in state receivership, and has been forced to withhold millions of dollars of general obligation bond payments in order to meet essential city needs. From January 2009 to March 2011, the city failed to provide annual financial information or material events notices, forcing investors to seek out other public sources of information, the SEC said.
“In an information vacuum caused by Harrisburg’s failure to provide accurate information about its deteriorating financial condition, municipal investors had to rely on other public statements misrepresenting city finances,” said George S. Canellos, co-director of the SEC’s division of enforcement.
Harrisburg did not submit its 2009 comprehensive annual financial report to EMMA until Aug. 6, 2012, and did not submit its 2010 CAFR to EMMA until Dec. 20, 2012. The city did not submit material event notices until March 29, 2011, after the SEC had commenced its investigation. The sources investors turned to for information on the city’s fiscal situation included Harrisburg’s 2009 Budget and Transmittal Letter, the 2009 State of the City Address, and its Mid-Year Fiscal Report for 2009.
The city’s 2009 budget, adopted in December 2008 and available on the city website, did not include any money for payments the city would likely need to make as guarantor of $455 million of outstanding debt of subsidiary authorities. The budget also stated that Harrisburg held a triple-A general obligation rating from Moody’s Investors Service, although Moody’s had already announced that it was downgrading Harrisburg to Baa1.
Then-Mayor Stephen Reed’s State of the City address delivered on April 9, 2009, discussed significant debt of the Harrisburg Authority as a situation that was an “additional challenge” and an “issue that can be resolved.” The address was misleading because it failed to mention that, by this time, Harrisburg had already made $1.8 million in guarantee payments on that debt, the SEC said. The city’s mid-year financial report also made no mention of guarantee payments, which at that time had surpassed $2.3 million, according to the SEC order.
Reed has himself come under scrutiny for his conduct in connection with the city’s debt, and former state-appointed receiver David Unkovic quit his post after only four months and has since criticized what he has characterized as a culture of corruption at the city.
SEC officials said information reasonably expected to reach the securities market can not be misleading, even if that information was not explicitly intended for investors.
“A municipal issuer’s obligation to provide accurate and timely material information to investors is an ongoing one,” said Elaine Greenberg, chief of the SEC’s enforcement division’s municipal securities and public pensions unit. “Because of Harrisburg’s misrepresentations, secondary market investors made trading decisions based on inaccurate and stale information.”
The city is directing inquiries to solicitor Jason Hess, who did not respond to a request for comment.
Harrisburg neither admitted nor denied the SEC findings, but has agreed to settle by desisting from any further violations, the SEC said. The commission took into account the city’s cooperation, including steps it has taken to strengthen its disclosure process. The SEC’s investigation was conducted by members of the enforcement division’s municipal securities and public pensions unit including senior enforcement counsel Yolanda Gonzalez and assistant director Ivonia K. Slade with assistance from municipal securities specialist Jonathan D. Wilcox. The investigation was supervised by Greenberg and deputy chief Mark R. Zehner.