By Lisa Lambert and Hilary Russ
WASHINGTON/NEW YORK, May 6 (Reuters) - Federal regulators on
Monday accused Pennsylvania's beleaguered capital, Harrisburg,
of committing fraud, in a move that officials said is meant to
send a warning to local officials about the accuracy of
financial information they provide to investors and taxpayers.
It is the first time the U.S. Securities and Exchange
Commission has charged a municipality for making misleading
statements outside of the disclosure documents provided in bond
Harrisburg agreed to settle the charges without admitting or
denying the findings in the SEC's order to cease and desist. The
city did not pay any monetary penalty as part of the settlement
and the SEC did not name any particular individuals.
The case should "emphasize to public officials who wish to
avoid personal liability under federal securities laws that they
should take steps to reduce the risk of misleading investors,"
said Elaine Greenberg, chief of the municipal securities and
public pensions unit at the SEC's enforcement division.
She declined to say whether the SEC will consider charging
any individuals in the Harrisburg case.
The SEC unearthed inaccurate, misleading or missing
information in various city presentations, including a budget, a
mid-year financial statement and a State of the City address.
Among other alleged omissions and late filings that span
several years and two mayoral administrations, Harrisburg
officials allegedly failed to mention in a 2008 financial report
that a major Wall Street credit rating agency had downgraded the
city's outstanding debt, the SEC said.
"There was a dearth of information out there regarding
Harrisburg's financial condition at a time when Harrisburg
should have been making investors aware of its troubles,"
Greenberg told Reuters.
STEPPED UP SCRUTINY
Alongside the charges, the SEC issued a report saying that
local officials may be liable under federal securities laws for
public statements made in the secondary market for municipal
Greenberg said the SEC issued the report "to broadly address
these issues that have never been addressed before."
The SEC has stepped up its scrutiny of the municipal bond
market since last summer, when one of its commissioners, Elisse
Walter, released a report that had been years in the making
calling for stricter regulatory enforcement and increased
That has led to a campaign of naming and shaming of
municipalities by the regulator.
Last Monday, the SEC accused Victorville, California, of
defrauding investors by, in part, giving them false information
about the security of bonds used for an airport hangar project.
In March, the SEC settled fraud charges with Illinois over
allegations that the state repeatedly misled investors about its
James Spiotto, head of the bankruptcy group at the law firm
Chapman and Cutler in Chicago, said that "whenever the SEC takes
a position on a matter, it's a reality check for those in the
The accusation could further damage Harrisburg's credibility
in the $3.7 trillion U.S. municipal bond market as it seeks to
reassure investors and finish implementing its recovery plan.
The city is now finalizing the sale and lease of various
city assets - including its troubled trash incinerator, which
sank it into debt that now tops $340 million.
Harrisburg went bankrupt in October 2011, but state
lawmakers later blocked the bankruptcy and a judge threw it out.
According to the SEC, investors had to make trading
decisions "based on inaccurate and stale information" about
Harrisburg's financial condition during the trash burner crisis.
That was largely because the city did not provide annual
financial reports and other notices such as interest payment
For example, Harrisburg's 2009 budget indicated that Moody's
Investors Service had a top-notch rating of triple-A on its
debt, based on its bond insurance. But by December 2008, Moody's
had announced its downgrade of the city's general obligation
bond rating to junk at Baa1, the SEC said.
Under Mayor Linda Thompson, Harrisburg has tried to catch up
on financial filings it should have made years ago - in
particular, its comprehensive financial reports - but the city's
2011 report has still not been published.
Thompson's office referred questions to the city's law
department, which did not reply to a message seeking comment.
Former Mayor Steven Reed also did not reply to an email
Thompson took office in January 2010 after ousting Reed, who
occupied the job for 28 years. Thompson is now seeking to defend
her position in this year's Democratic primary elections.
One of the rival candidates, independent bookstore owner
Eric Papenfuse, said the SEC's findings "expose a continuing
pattern of fraudulent and misleading practices."
A previous state-appointed receiver for Harrisburg requested
a criminal probe into the incinerator deals. A local prosecutor
told The Patriot-News in April that a criminal investigation is
still a possibility.