The Securities and Exchange Commission had another "first" this November, when it assessed a $20,000 financial penalty against a municipal issuer for false and misleading statements in its disclosure documents relating to the development of a multi-use arena and ice-hockey rink. This is the first time that the SEC has assessed a financial penalty against a municipal issuer. On Nov. 5, the SEC Enforcement Division's Municipal Securities and Public Pensions Unit, which focuses on misconduct in the municipal securities market or related to public pension funds, filed a settled administrative proceeding against the Greater Wenatchee Regional Events Center Public Facilities District (the "Issuer"), a municipal issuer in the state of Washington's Wenatchee Valley region. The SEC also charged the underwriter and outside developer of the project and three individuals involved in the offering.
In 2008, the Issuer, a municipal corporation formed by nine Washington cities and counties in 2006 to fund the Town Toyota Center, located in the city of Wenatchee, issued $41.77 million in bond anticipation notes in 2008, and defaulted on its principal payments in December 2011. The SEC alleges that the Issuer's primary disclosure document accompanying the Issuer's offering of bond anticipation notes in 2008 - called the "official statement" - contained inaccuracies. Specifically, the official statement stated there had been no independent reviews of the financial projections for the events center, when in fact, an independent consultant twice examined the projections and raised questions about the center's economic viability. The official statement also failed to disclose that financial projections had been revised upward based in part upon optimistic assurances by civic leaders that the community would support the project. The document also omitted key information about the possibility that the City of Wenatchee's remaining debt capacity of $19.3 million would limit its ability to support any future long-term bonds.
Without admitting or denying the allegations, the Issuer agreed to settle the SEC's charges by paying a $20,000 penalty and undertaking remedial actions, including training for personnel involved in the offering and disclosure process. The Issuer also agreed to adopt written policies for disclosures in municipal offerings and continuing disclosure obligations, and to designate an individual responsible for ensuring compliance with those obligations.
Possibly in an effort to preemptively deflect criticism that a penalty against a municipal bond issuer would hurt the underlying investors, Andrew Ceresney, co-director of the SEC's Division of Enforcement, stated that "[f]inancial penalties against municipal issuers are appropriate for sanctioning and deterring misconduct when, as here, they can be paid from operating funds without directly impacting taxpayers." Despite these comments, it appears any penalty assessed against an Issuer - whether paid out of "operating funds" or not - will ultimately harm the underlying investor and project. Due to the SEC's penalty, it is possible that the multi-use arena and ice-hockey rink may no longer have a $20,000 feature that was originally intended.
The SEC's settled administrative proceedings also named the developer Global Entertainment and its then-president and CEO Richard Kozuback, the underwriter Piper Jaffray & Co. and its lead investment banker Jane Towery, and Allison Williams, a senior staff member for the Issuer who certified the accuracy of the official statement. All the respondents neither admit nor deny the SEC's findings.
The takeaways here are twofold. First, it highlights the SEC's commitment to hold accountable the individuals that review these public statements, as the SEC charged a senior staff member for the Issuer who certified the accuracy of the official statement. Second, this case underscores the SEC's continued focus on the municipal bond industry, as there has been a recent string of high-profile SEC actions involving this industry. In April, the SEC charged the City of Victorville (CA), an underwriter, a developer, and others with fraud for, among other things, misuse of proceeds and issuing false and misleading disclosure documents relating to an inflated valuation for the underlying project. In May, the SEC charged the City of Harrisburg, Pa., with fraud for misleading public statements about its financial condition in the city's budget report, annual and mid-year financial statements and a State of the City address. This was the first time that the SEC had charged a municipality for misleading statements made outside of its securities disclosure documents. The SEC alleged that, when the City's financial condition was deteriorating, the information provided to municipal bond investors was either incomplete or outdated.
Given this string of enforcement actions involving municipal bonds, the SEC clearly has been taking a critical eye when scrutinizing any and all disclosure documents provided to the public. Therefore, it is important for municipal bond issuers to ensure all disclosure documents are accurate, complete, and up-to-date. Moreover, issuers of municipal bonds should adopt written policies for disclosures in municipal offerings and continuing disclosure obligations, and to designate an individual responsible for ensuring compliance with those obligations.
Andrew J. Dunbar and Jose F. Sanchez are partners at Sidley Austin LLP in Los Angeles.