SEC Can't Mollify Harrisburg Deal Skeptics

The Securities and Exchange Commission’s settlement with Harrisburg, Pa., over charges of fraudulent financial disclosures didn’t sit well with lawyers, including a former attorney for the city council, who argued the regulator didn’t go far enough.

The SEC last week settled with Pennsylvania’s broke capital city in a deal that featured a promise by Harrisburg officials to report its finances more transparently, but no fines or prosecutions.

“The case the SEC brought was a narrow case in terms of what was going on,” said one official, who noted that the investigation focused on the period from January 2009 to March 2011, when Harrisburg failed to make securities disclosures. The official said the commission was further limited by the U.S. Supreme Court’s unanimous ruling in Gabelli v. SEC in February, in which the top court ruled that the five-year statute of limitations begins with the occurrence of fraud, not that of discovery.

But Anthony Sabino, a Mineola, N.Y., attorney and an expert in antitrust law and securities regulation, argued that the federal agency was too cautious. 

“You can’t fault the SEC. Yes, there is a very strict statute of limitations, yes, the commission does not regulate local governments, and yes, the SEC has limited resources so they can’t pursue everything,” Sabino said.

“But arguably, could they have done more? Moved faster, probed deeper? Surely. Most of all, could the agency have done more to bring the bad guys to heel? Of course. After all, you’re talking about elected officials that arguably violated the public trust. Shouldn’t individuals propagating the information be brought to heel?”

Former Harrisburg City Council attorney Mark Schwartz was even more blunt.

“This is a real travesty. These were the worst deals I’ve seen in thirty years,’ said Schwartz, a former bond lawyer and investment banker. “There was no excuse to blow the statute of limitations. I gave them a roadmap, bond issue by bond issue and I did not receive so much as a telephone call.”

The SEC in its order essentially said that in the absence of securities disclosures, public documents such as budgets posted on websites and even state of the city addresses amount to de-facto disclosure.

“Our only hook was the antitrust provision of federal securities laws,” the SEC official said. “We’re addressing the secondary market.”

Its Harrisburg case marked the first time the SEC has charged a municipality for misleading statements made outside of its securities disclosure documents.

Harrisburg, according to the the SEC’s cease-and-desist order, failed to properly disclose required information to the Municipal Securities Rulemaking Board’s EMMA system, and also made misleading statements about its credit rating and debt payments.

The Philadelphia Inquirer reported Wednesday that the SEC’s main office in Washington, not the regional office in Philadelphia, pulled the trigger on what action to take, preferring to “more broadly address” city officials’ responsibilities.

One former SEC official acknowledged that the commission’s general powers are limited. “They’re sending a signal to the market that this is the best they can do, give the task that they have. Some people may read into it what they want.”

Schwartz responded: “If this is the best the SEC can do then they should pack it up and go home, saving taxpayer money. They give drones a bad name.”

Harrisburg is saddled with roughly $350 million of debt that it cannot pay, largely due to bond financing overruns related to an incinerator retrofit. The state Senate last fall held two investigative hearing on the financings, based on an audit by that the Harrisburg Authority public works agency released in January 2012.

Eric Papenfuse, a Democratic candidate in next Tuesday’s mayoral primary and the owner of the Midtown Scholar Bookstore in Harrisburg, told the Senate that in 2007, his final year as a member of the Harrisburg Authority’s board, he asked then-attorney general Tom Corbett – now the governor – and others to investigate the financings, only to have federal officials threaten him with obstruction of justice charges.

“FBI agents from their public corruption units visited me. They didn’t want me to say anything publicly at the time. They said they didn’t want to affect an ongoing investigation,” Papenfuse said in an interview.

The U.S. attorney’s office for the Middle District of Pennsylvania said last week that it was reviewing the SEC’s order. A spokesman for state Attorney General Kathleen Kane on Wednesday invoked the policy of the office “not to confirm or deny an investigation.”

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