WASHINGTON — The Securities and Exchange Commission's investigation of the Port Authority of New York and New Jersey must determine if investors needed to know about $1.8 billion of controversial spending, securities law experts said. Others said any SEC enforcement action would not be a fix for the authority's problems.
The authority disclosed last week in a preliminary official statement for an upcoming offering that it is under investigation by the SEC and various other authorities, including the U.S. Attorney's Office in New Jersey and the Manhattan district attorney. The Bergen Record, citing unnamed individuals familiar with the situation, reported that the SEC investigation centers around whether the authority was justified in spending money it raised for New Jersey road repair projects not within its jurisdiction.
"I think investors do want to know if there are illegalities," said one source who did not want to be named. He said the investigation may be the result of a "political fight" started by whistleblowers seeking to further undermine New Jersey Gov. Chris Christie, who has been under continuous scrutiny following the George Washington Bridge lane closure scandal several months ago.
Christie reportedly pressured the authority to find a way to spend money on New Jersey roads and other projects, even though the authority's spending is supposed to be restricted to facilities it owns and operates. The port authority uses its own internal lawyer as bond counsel, which is not common practice. The source added that it is unlikely that the impact of the investigation will be felt anytime soon and that there is certainly no guarantee that the authority or any individual working for it will actually face SEC charges.
"They may just drop it," the source said. "Even when they pursue an investigation, it takes years.
Securities lawyers said the SEC will have to consider whether the authority's use of funds on non-authority assets had any chance of impacting the authority's bond credit or harming investors. The port authority's revenues are derived primarily from the tolls, fares, dockage fees, and other charges for the use of, its facilities. Not all authority facilities generate surplus revenue, and some operate at a deficit, according to the POS. The authority's bonds are general obligations of the authority, and are secured by the facility revenues and by reserve funds.
The authority has sold almost $7.5 billion of bonds over the past three years, including $3.7 billion in 2012, which made it the eighth biggest municipal issuer in the nation that year. Some experts have questioned the port authority's fiscal soundness in the wake of the bridge scandal and other controversial decisions by the authority, such as its borrowing of billions of dollars to redevelop the World Trade Center site. There has also been a perception that the appointees to the authority have acted to please the governors that appointed them, rather than the people the authority is charged with serving.
Manhattan Institute senior fellow Nicole Gelinas said the revelation of the SEC investigation highlights the complacency of muni bond investors, who could have raised questions about such behavior long ago.
"It would be nice if investors cared about these things individually," she said.
An SEC investigation won't fix systemic problems with the port Authority, Gelinas said, adding that the developments over the past few months reflect poorly on the characters of both those running the authority and of those in power in New York and New Jersey. Gelinas joined others in pointing out that authorities are likely to move deliberately, taking months or even years to act.
"An investigation helps, but its just one more piece in the mosaic," she said.
The SEC has declined to comment, and has a policy of not commenting on open investigations. The port authority has said it will not comment beyond the disclosure in its bond documents.
