WASHINGTON – The Port Authority of New York and New Jersey has agreed to admit wrongdoing and pay a $400,000 penalty to settle Securities and Exchange Commission charges that it failed to disclose risks associated with New Jersey road projects to the investors that bought the bonds to finance them.
The Port Authority is the first municipal issuer to admit wrongdoing in an SEC enforcement action, according to the SEC. However, James Sottile, the lawyer for the Port Authority, disputed that characterization in a letter he sent to the SEC following the announcement of the settlement. He said that the SEC's March 2016 settlement with California's Westlands Water District required a similar admission from the issuer that its actions had violated securities laws.The commission found that the Port Authority sold $2.3 billion of bonds to investors despite internal discussions about whether the projects the bonds were to finance were beyond the authority's mandate and therefore illegal. The bonds were consolidated bonds and, according to part of a Port Authority Consolidated Bond Resolution, could only be issued: for purposes where the authority is authorized by law to issue bonds at the time of issuance, to refund outstanding Port Authority bonds, and to serve as a unified medium for refinancing purposes.
The projects related to: the Route 1&9 Pulaski Skyway, Route 139, Route 7 Hackensack River Bridge, and Route 1&9T, all of which are state roadways in New Jersey.
The SEC said the Port Authority previously acknowledged in a handout at a meeting that its projects had to be in connection with roads and other infrastructure located within the Port District and that it historically has not been able to fund projects that were not part of, and did not bear any connection to, an existing Port Authority facility.
"The Port Authority represented to investors that it was authorized to issue bonds while not disclosing significant known risks that its actions were not legally permitted," said Andrew Calamari, director of the SEC's New York Regional Office. "Municipal bond issuers must ensure that their disclosures are complete and accurate so that investors can make fully informed decisions about whether to invest."
The Port Authority issued a statement stressing that its settlement with the SEC stipulates that it acted "negligently" in having failed to disclose the risks to bond purchasers and that there is no finding that it acted willfully or intentionally. Additionally, no bondholders suffered any loss as a result of the failure to disclose because the Port Authority did not ultimately use bond proceeds to fund the roadway projects, it said.
Sottile, in his follow-up letter, additionally said the SEC's press release mischaracterized the settlement as part of an "ongoing investigation" and an action that was the result of "wrongdoing" which implies intentional misconduct. He is asking the SEC to publicly acknowledge that there is not a continuing investigation and correct its press release as necessary.
SEC officials could not immediately be reached for comment.
The authority said it has "redoubled its efforts to adhere to the highest standards of accountability, transparency, and ethical conduct." Remedial actions the SEC took into account in the settlement include the authority's enhanced procedures around approving capital projects, its retaining and using outside counsel for all bond offerings, and its hiring of a new permanent general counsel.
As part of the settlement, the Port Authority will have to retain an independent consultant that will assess the authority's policies and procedures related to disclosure and make recommendations for improvements.
The bond offerings in question, which took place between January 2012 and June 2014, trace back to a five-year transportation capital plan that New Jersey Gov. Chris Christie announced on Jan. 6, 2011. The plan included $1.8 billion in projects that Christie had asked the Port Authority to pursue along with the New Jersey Department of Transportation (NJDOT), according to the settlement.
Following a March 18, 2011 meeting about the idea of pursuing the roadway projects that a Port Authority executive and two lawyers attended, one of the lawyers wrote that "having taken a closer look at the projects in question, there is no clear path" for the Port Authority to legislative authority to undertake such projects.
However on March 28, the two lawyers said they had determined that they could link the roadway projects to existing Port Authority authorization under legislation involving the Lincoln Tunnel because it could be argued that all the roadways the projects covered approached and fed into the Lincoln Tunnel. But they added that their conclusion was "not without doubt" and gave rise to risk of a successful challenge by bondholders and investors.
When the Port Authority's Board of Commissioners met the next day to approve the projects, they were not told of the legal issues that might accompany the projects, the SEC found. Additionally, the Port Authority's official statements for its issues related to the projects in January 2012, December 2012, November 2013, and June 2014 never disclosed the risks, according to the SEC.
The Port Authority, in its statement on the settlement, maintained that it always had statutory authority to spend the proceeds on the road projects but acknowledged the SEC's finding that it acted negligently in not disclosing the qualifying language and risks to bond purchasers.
