SEC Steps Up Scrutiny Of Municipal Bonds: Recently Filed Enforcement Actions

As Bret Leone-Quick discussed in a post last week, the SEC has been stepping up its scrutiny of municipal bond offerings. Indeed, in the last year the SEC has filed a number of enforcement actions against municipal bond issuers and underwriters. The alleged violations have involved misstatements or omissions concerning such topics as: compliance with tax exemption requirements or reporting requirements; limitations on debt capacity; property valuations; and municipal accounts.

In particular, in announcing its Municipalities Continuing Disclosure Cooperation Initiative, which encourages municipal issuers and underwriters to self-report possible disclosure violations (as discussed in more detail in Bret's post), the SEC specifically noted that it may file enforcement actions against issuers for inaccurately stating in final official statements that they have substantially complied with their prior continuing disclosure obligations. Underwriters may also be charged with securities violations if they have failed to exercise adequate due diligence in determining whether issuers have complied with such obligations. The SEC cited the West Clark Community Schools case discussed below as an example of such an enforcement action.

Notably, in many of these recent enforcement actions the SEC has asserted claims for merely negligent violations of Sections 17(a)(2) and (3) of the Securities Act, instead of, or in addition to, claims for violations of Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5, which require proof of knowing or reckless misconduct. In some court cases the SEC has also successfully argued that the alleged knowledge of an employee or agent may be attributed to the bond issuer for purposes of pleading that the issuer acted with the requisite "scienter" to support a 10b-5 charge. Thus these cases raise a concern that even relatively "innocent" mistakes may lead to SEC charges.

While the issuer was actually fined in only one of these cases, the SEC has also required issuers to provide training for personnel or to hire consultants to review disclosure practices and procedures as a condition of settlement. Meanwhile, underwriters have often faced more substantial financial penalties. Some particular examples are discussed further below. More than ever, these cases illustrate how important it is for government entities and underwriters to obtain careful counsel about potential pitfalls in bond offerings.

In re the Greater...