Panel Weighs Disclosure Negligence

CARLSBAD, Calif. — It doesn’t necessarily take criminal intent, but merely negligence for local government officials to find themselves the subject of a criminal investigation stemming from a bond issue.

That comment from Steve Heaney, managing director at Stone and Youngberg LLC, set the table for a panel discussion of issuer responsibility for disclosure at a California Debt and Advisory Commission event here Wednesday preceding The Bond Buyer’s California Public Finance Conference.

Heaney, American Governmental Financial Services president Robert Doty, and San Diego chief operating officer Jay Goldstone discussed how the game has changed in terms of personal liability for local government officials as a result of fiscal stress.

A lack of comprehension by public officials of what they are signing when disclosure documents are released about bond issues has resulted in the loss of millions of dollars to municipalities and personal liability for the officials, Doty said.

It is not just the recent years of economic distress that have resulted in increased complexities in the bond markets and more regulation from federal agencies. The burgeoning growth in issuance over the past 30 years has also had an impact.

Up until the 1970s, the bond market was the province of large institutional investors, Heaney noted.

“People tell me in 1975 the whole municipal bond market was $50 billion of outstanding debt, but in California last year alone, the municipal bond market was $57 billion,” he said. “This hasn’t come without problems.”

All three speakers cited municipalities that have faced massive losses, dealt with personal liability issues, and in some cases were prosecuted. But they also provided reassurance by outlining steps that can be taken.

First, public officials need to both know and understand what they are signing; they cannot simply rely on advisors.

Secondly, keep disclosures filings up to date. Some cities have found themselves in trouble because their most recent financial reports are months old when bonds are issued. Cities risk liability with dated disclosure information, because bondholders will sue if they feel they lost money because they made a buying decision based on dated information.

Other oft-repeated advice is don’t rely on the underwriter to write the disclosure, because their goals are different from those of municipalities. Instead of relying on the underwriter’s counsel, municipalities should hire their own counsel.

“It will be worth it in the long run,” Doty said. “It’s the difference between spending a couple of thousand dollars or it costing seven or eight figures if something happens.”

On the bright side, cities that take actions to protect themselves can avoid some of the pitfalls experienced by other municipalities that learned the meaning of full disclosure and transparency the hard way.

“I saw a quote from [Securities and Exchange Commission] chair,” Heaney said. “He said if someone is lying, stealing or cheating, whether it is a municipal or corporate action, we will bring them to justice.”

The landscape has changed and it is important to recognize that we are in a different place then we were 10 years ago, Heaney said.

“But you do not have to let events dictate your actions,” he said. “You can take action and shape events on your own.”

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER