The SEC filed its first action against a state, charging
New Jersey with fraud in connection with multiple offerings of municipal bonds
dating back to 2001. In the Matter of State of New Jersey, Adm. Proc.
File No. 3-14009 (Aug. 18, 2010).
The Order for Proceedings alleges fraud in violation of
Securities Act Section 17(a)(2) & (3) in connection with 79 municipal bond
offerings from August 2001 through April 2007 for $26 billion. The cases center
on the failure of the state to make certain disclosures regarding the financial
condition of two large pension funds, the Teachers' Pension and Annuity Fund
("TPAF") and the Public Employees' Retirement System ("PERS"). Specifically,
the state created the fiscal illusion, according to the SEC, that the two
pension funds were being adequately funded when in fact they were severely
under funded. The illusion was created through a series of misrepresentations
regarding legislation adopted in 2001 which increased benefits, subsequent
legislation intended to fund the costs associated with the increased benefits,
the adoption of a so-called five year phase in plan under which the plans were
to be funded and the fact that the phase in plan was abandoned.
New Jersey was aware of the underfunding, according to the
Order, but took no steps to correct the misleading documents used in connection
with the bond offerings. Indeed, its disclosure regarding contributions to the
plans omitted present and historical information about the contributions.
During this period the state did not have any written
policies and procedures regarding the review or update of the bond offering
documents. No training was given to its employees regarding disclosure
obligations. This resulted in material misrepresentations.
Following an April 2007 news article which raised questions
about the adequacy of the disclosure by New Jersey, the state retained
disclosure counsel. During 2007 and 2008 the state, with the assistance of
disclosure counsel, reviewed, evaluated and enhanced its disclosures. The state
has also adopted formal, written policies and procedures. A committee now
oversees the entire disclosure process and an annual mandatory training program
has been implemented.
To resolve the proceeding the state consented to the entry
of a cease and desist order from commencing or committing or causing any
violations and any future violations of the Sections on which the Order is
Although this is the first proceeding against a state,
others have been brought against governmental entities. For example, in 2006 an
administrative proceeding named the City of San Diego as a respondent. The
Order there is based on fraud allegations made in connection with municipal
bond offerings, discussed
more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas
See also: SEC versus New Jersey by Doug Cornelius