The U.S. Securities and Exchange Commission on Monday charged the city
of Harrisburg with securities fraud, saying the state capital made misleading
financial statements as it was deteriorating financially and being downgraded by
It is the first time the SEC has charged a municipality with making misleading statements outside of the municipality's securities disclosure documents.
Harrisburg is a near-bankrupt city burdened by both a structural deficit and millions in long-term debt, much of it due to an incinerator project gone awry.
The SEC said misleading statements were made in the city's budget report, annual and mid-year financial statements, and a State of the City address. The problematic statements were not in financial disclosure forms intended for bond investors but in other public statements and documents.
While no individuals have been charged in connection with the Harrisburg investigation, it appears the financial regulator hopes to send a message to other elected officials that they must provide current and accurate financial information.
"[P]ublic officials should be mindful that their written or oral public statements may affect the total mix of information available to investors," the SEC said in a statement. "This could result in anti-fraud liability under the federal securities laws for the public officials making such statements if they are materially misleading or omit material information."
Monday's charges are meaningful, said Cate Long, a blogger on municipal bonds for financial news provider Reuters.
"It does definitely put a chill on other public officials," Ms. Long said. "It signals that someone is watching ... This clearly demonstrates that they will go back and look at what people are saying and compare it to financial documents."
Among the misleading statements, according to the SEC, the 2009 budget misstated Harrisburg's credit rating as "Aaa" by Moody's when in fact Moody's had downgraded the city's general obligation credit rating to Baa1 by December 2008. Also, a 2009 mid-year fiscal report on the city's website that purported to show a snapshot of budget-to-actual figures at the middle of the year "did not reference any of the guarantee payments the city had made on the municipal resource recovery facility debt, which at this mid-year point totaled $2.3 million (7 percent of its general fund expenditures)."
Further, "Harrisburg failed to submit annual financial information, audited financial statements, notices of failure to provide required annual financial information and material event notices," according to a report from the SEC.
A statement from Harrisburg Mayor Linda Thompson, who is in a heated re-election contest to lead the city of just under 50,000 people, said she has signed a settlement agreement with the SEC, her administration cooperated fully with the investigation and she considers the matter concluded.
"Today marks a turning point in the City's financial history," said a statement from her office.
"[T]o prevent such things from happening in the future, and as the SEC is aware, the City has completely revamped its policies and procedures for financial disclosures. These new policies and procedures are designed to ensure that accurate and complete financial information regarding the City's finances is made available to investors and the public in a timely manner."
According to a cease-and-desist order from the case, the city has agreed to provide certain ongoing financial information for bondholders as well as enhance its disclosure process and provide an annual training for employees on the disclosure process.
"Bonds are contracts," Ms. Long said. "Legal contracts between the issuer -- the municipality -- and the investor. And in any contract, you can't lie."
The Harrisburg situation is fairly unusual, said James Spiotto, a Chicago-based attorney involved in municipal debt refinancing and restructuring.
"This is really very unique. You don't see it very often," Mr. Spiotto said. "States and municipalities try to be as accurate as they can [in disclosing finances] because it is important to their credibility in the market."
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