WASHINGTON - State and local officials who traditionally believed they are safe from Securities and Exchange Commission enforcement action if they avoided exchanges of services from muni market participants for favors should think again in the face of increased SEC focus on anti-corruption efforts, former commission lawyer Peter Chan said.
Chan, who left the SEC earlier this month and now practices at Morgan, Lewis & Bockius in Chicago, warned that the commission will be aggressively pursuing civil litigation against public officials whose actions mislead the public or their fellow officials with respect to the muni securities market.
"One of the things you can see is a ramped-up anti-corruption effort by the SEC through civil enforcement action," Chan told The Bond Buyer in a recent interview.
Traditionally, Chan said, market participants have thought about public corruption in terms of quid pro quo exchanges in which private entities such as dealers or investment advisers provided gifts or favors in exchange for business or some other official act.
Municipal Securities Rulemaking Board and SEC rules curtail this behavior to some extent by limiting the political contributions that dealers can make to officials in positions to influence the award of business. The MSRB has also proposed such rules for registered municipal advisors.
But state and local officials can still commit fraud absent evidence of a quid pro quo arrangement and that the SEC will not hesitate to work in conjunction with criminal prosecutors to pursue those cases, Chan warned.
"The SEC is very much willing to use its civil statutory tools," Chan said. "If it can prove an exchange of favors, that's great, but it doesn't need to."
Chan said members of public boards need to be particularly wary about accepting the sorts of benefits from outside entities that are commonly accepted by private citizens in other types of business. Expensive sports tickets, dinners, and other lavish perks might not definitively influence public decisions, but Chan said a failure to disclose such gifts can easily become a fraud case.
He pointed to the SEC's case against former Detroit Mayor Kwame Kilpatrick, who the commission charged with fraud for failing to disclose travel perks he received to steer public pension officials to invest $117 million in a real-estate investment trust. Kilpatrick was eventually convicted in a criminal case and went to prison.
Chan said the SEC's thought process in such cases will be to ask whether any benefits a board or city council or other public member received were fully disclosed. If not, the SEC will ask whether that knowledge would have been material to the other members. If the answer is yes, the SEC will act because it is against the federal securities laws to omit material information in connection with the purchase or sale of securities.
And if there is associated criminal conduct, issuer officials could face a double whammy the way Kilpatrick did, he added.
"The industry should assume that when things have the smell of public corruption, the SEC is having a dialogue with the U.S. attorney," Chan said. If the benefits are something you wouldn't want the world to know about, it could be a problem, he suggested.
