BRADENTON, Fla. — Officials overseeing bankrupt Jefferson County, Ala., got a lesson in their "disclosure responsibilities" this week.
John McNally, a partner who works in the Washington, D.C., office of Hawkins, Delafield, & Wood LLP, and Birmingham-based Balch & Bingham LLP partner Foster Clark provided the training to county commissioners.
"It was a primer on federal securities law on what to address in the official statement and when they are otherwise speaking to the market," said McNally, an expert who teaches disclosure courses to public officials around the country.
Hawkins, Delafield & Wood is also underwriters' counsel on the nearly $2 billion sewer system refunding that Jefferson County plans to issue immediately after exiting Chapter 9 bankruptcy in December. Balch & Bingham is bond counsel. Citi is the book-runner.
McNally said he was asked to do the public securities law training in advance of rating agency presentations and road shows for the $2 billion sewer offering, and when speaking to the press going forward.
In his hour-long presentation, McNally said he stressed that commissioners need to be "sensitive" and address the facts in the official statement and in all disclosures that reach the public and press. He also said that the message conveyed by commissioners "needs to be consistent."
McNally discussed cases brought by the Securities and Exchange Commission as examples of violations, including recent cases against Harrisburg, Pa., and South Miami.
In Harrisburg, the SEC found that misleading statements were made in the city's budget report, annual and mid-year financial statements, and in a state of the city address by an official.
It was the first time a municipality was charged for making misleading statements outside of securities disclosure documents.
The SEC ordered Harrisburg to "cease and desist" from further violations, but did not take action against any individual official.
Harrisburg serves as "a clarion call to municipal officials" regarding potential liability for materially misleading statements or omissions that are reasonably expected to reach investors, McNally said in an analysis about the case on his firm's website.
South Miami was a borrower in two pooled conduit municipal bond offerings, and used the proceeds to finance a municipal parking garage that evolved into a mixed-use retail and public parking structure for a for-profit developer, against bond counsel's advice.
While it violated the Internal Revenue Service's regulations regarding impermissible "private business use" with tax-exempt bond proceeds, the SEC concluded that the city violated the Securities Act because of material misrepresentations in documents that were not provided to investors but were part of the basis for bond counsel's opinion regarding the tax exemption of the bonds.
In addition to a cease and desist order, South Miami agreed to hire a disclosure consultant for three years.
"As we prepare to exit bankruptcy, Jefferson County realizes its responsibility to keep the financial community and public informed and to perform responsibly and lawfully," said a statement from County Manager Tony Petelos about McNally's presentation. The "public training was a step forward in preparing us to execute our plans responsibly," he said.
Jefferson County filed for bankruptcy in November 2011, and is currently seeking votes from creditors on its plan of adjustment.
The refinancing later this year is an integral part of the plan, and involves restructuring $3.1 billion of defaulted sewer debt, which will result in those creditors recovering 60% to 80% of their investment.
Investors holding the county's lease, school, and general obligation warrants will be made whole for their principal.
