Why Maine's bond sale cancellation didn't violate laws

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WASHINGTON - Despite the moral outrage sparked by last month's cancellation of Maine's already-priced sale of municipal bonds, it is unlikely that any laws or rules were violated or that the state has lost its access to the market.

Lawyers, analysts, and the state’s treasurer told The Bond Buyer that they expect Maine Gov. Paul LePage’s eleventh hour cancellation of a June 12 $112.9 million competitively-bid general obligation bond sale will probably not have any legal or market ramifications. Some of the bonds were tax-exempt and some were taxable.

LePage, a Republican, surprised and even angered many industry participants with his refusal to authorize the bonds, which were voter-approved. But lawyers were skeptical that, although the governor was venting his frustrations with the state legislature, the cancellation presents a legal problem.

“The circumstances of canceling a sale is not in and of itself a problem,” said one securities lawyer who agreed to provide analysis without being identified. The lack of an actual sale of securities having occurred, although Wells Fargo Securities and Citigroup had been declared winning bidders already, makes it unlikely that the Securities and Exchange Commission would determine a securities law violation occurred, the lawyer said.

The real risk of such an unusual move, he continued, is that it could catch the eye of regulators who might find something more troubling.

“It invites scrutiny, which may bring other things to light,” the lawyer said. “It’s classic headline risk, but that’s about it.”

Another lawyer, who also asked to speak without being identified, said he thinks any legal concern that could potentially arise from the situation would be in the form of a contract dispute between the underwriters and the issuer. But even in that case, the lawyer said, the firms would have to demonstrate that a contract was breached and that they suffered damages as a result.

He said it's unlikely the underwriters would take action against the issuer, though the cancellation could be considered a breach of what he called the “unwritten rules” of the market.

“I get why people are frustrated by it,” the lawyer said.

Analysts speaking in the days after the sale expressed some concern about how the ordeal might affect the demand for Maine’s bonds in the future, as did Maine Treasurer Terry Hayes.

But Joseph Krist, a partner at Court Street Group Research and former buy-side analyst, expressed doubt that the incident would damage the state’s market access or credit.

Maine GO bonds are rated Aa2 by Moody's Investors Service and AA by S&P Global Ratings.

“It strikes me as less an issue with the state's credit and more about the governor's strange approach to so many things,” Krist said. “Fortunately the state will have a new governor after this November's election. I would be annoyed if I was a buyer, too, as the action shows tremendous disrespect for the buyers. But it has to be viewed in the context of Gov. LePage's role as the nation's crankiest governor,” Krist said.

Krist’s latter comment is a reference to the term-limited LePage’s reputation for stirring up controversy. He earned national headlines many times in recent years for incidents such as leaving profane and threatening voicemails for political opponents. He also publicly compared the Internal Revenue Service to the Gestapo - the secret police of Nazi Germany.

Citi and Wells Fargo, the underwriters, both declined to comment on whether the situation has been satisfactorily resolved, but Hayes said she thought it has been.

“We were able to unwind the transaction,” Hayes said, adding that Wells and Citi got their earnest money back.

Hayes, who is running for governor as an independent, said she thinks both banks were satisfied but stressed that the situation was “significantly stress-inducing.”

Hayes said her office has had no contact with any regulatory agency, but that she discussed the situation with both Moody’s and S&P. Hayes said the state plans to come back to the market with a very similar deal in a matter of weeks, because it still needs the money. She said she discussed the matter with LePage and believes he will not object.

“I think this is an unusual circumstance that no one wants to repeat,” she said.

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Securities law Primary bond market SEC enforcement Competitive sales results SEC Washington DC Maine