WASHINGTON — The Securities and Exchange Commission's unprecedented enforcement action against a former municipal official earlier this week in a case involving Allen Park, Mich. should make public leaders aware and cautious, legal experts and issuer officials said Friday.
The SEC announced on Nov. 6 that it had charged Allen Park and two former city leaders with fraud in connection with $31 million municipal bonds sold in 2009 and 2010 to finance a movie studio project in the city. For the first time, the SEC charged a municipal official — former Allen Park Mayor Gary Burtka — as a "control person" under Section 20(a) of the Securities Exchange Act of 1934, an 80 year-old provision designed to prevent leaders of issuers from escaping liability by hiding behind lower-level or "dummy" officers.
Burtka agreed to pay $10,000 to settle charges that he was liable for misleading the public because he exercised control over the city and over the administrator who, the SEC said, filled the offering documents with lies about a robust movie studio public-private partnership that had actually collapsed.
John Grugan, a partner at Ballard Spahr in Philadelphia, said the action puts issuer officials in an uncomfortable place.
"They see themselves as cheerleaders for municipal efforts," Grugan said, explaining that public officials want to portray city projects in the most positive light. The SEC's settlement order against Burtka notes that the then-mayor personally attended meetings where the studio project was discussed, and never admitted to various problems plaguing the arrangement.
"Very few public officials have ever viewed themselves as subject to this kind of liability," Grugan said, adding that the SEC signaled its intentions to hold public officials liable for their misleading public statements in the 21(a) report on its 2013 action against Harrisburg, Pa.
The SEC had flexed its muscles under the Section 20(a) control person liability provision outside the muni world before, but some federal appeals courts had limited its power to do so by concluding that the commission is not a "person" eligible to bring litigation under that section of the Exchange Act. The U.S. Sixth Circuit Court of Appeals, which covers Michigan, ruled against the SEC's power to do so in 1974. But the Dodd-Frank Act of 2010 removed all doubt and the law now states explicitly that the SEC, and not just private litigants, can bring cases under 20(a).
John McNally, a partner at Hawkins Delafield & Wood in Washington, said the takeaway from this case is even broader.
"The message is not necessarily that 'control persons' will have liability if persons they control violate the federal securities laws, but that if one attends meetings at which concerns are raised and make statements in public forums that are materially misleading, you can be liable as a control person even if you did not personally execute the official statement or sign closing certifications as to the accuracy of official statements," he said.
Timothy Firestine, chief administrative officer of Montgomery County, Md., said the case appears to be an egregious example, but still called the implications "a little disconcerting." He said he is concerned the SEC could target officials for less flagrant conduct.
"I don't think we pay a lot of finance directors enough to take that kind of risk," Firestine said.
Ben Watkins, chair of the governmental debt management committee at the Government Finance Officers Association and Florida's director of bond finance, said the action is a reminder both that public officials and administrators need to understand their responsibilities under federal securities laws and that P3s are not a magic solution for municipal development.
A minority of public officials have a tendency to believe that offering documents are promotional materials, Watkins said, a good way to run afoul of the SEC's enforcement division. "It's imperative that all the information is accurate and truthful," he said.
