EXECUTIVE AND FORMER EXECUTIVE PLEAD GUILTY IN MUNICIPAL BOND BID-RIGGING CASE

The following excerpt is from the Department of Justice website:

January 9, 2011

"WASHINGTON — An executive and a former executive of Rubin/Chambers, Dunhill Insurance Services, also known as CDR Financial Products, pleaded guilty today in the Southern District of New York for their participation in bid-rigging and fraud conspiracies related to contracts for the investment of municipal bond proceeds and other related municipal finance contracts, the Department of Justice announced.

Zevi Wolmark, also known as Stewart Wolmark, the former chief financial officer and managing director of CDR, and Evan Andrew Zarefsky, a CDR vice president, pleaded guilty before U.S. District Judge Victor Marrero. CDR is a Beverly Hills, Calif.-based financial products and services firm. Wolmark and Zarefsky, together with CDR and its founder and president, David Rubin, were indicted on Oct. 29, 2009. Rubin and CDR pleaded guilty on Dec. 30, 2011.

Wolmark and Zarefsky each pleaded guilty to participating in separate bid-rigging and fraud conspiracies with various financial institutions and insurance companies and their representatives. These institutions and companies, or “providers,” offered a type of contract, known as an investment agreement, to state, county and local governments and agencies throughout the United States. The public entities were seeking to invest money from a variety of sources, primarily the proceeds of municipal bonds that they had issued to raise money for, among other things, public projects. Wolmark and Zarefsky also pleaded guilty to one count of wire fraud in connection with those schemes.

“Through corruption and bid rigging, Zevi Wolmark and Evan Zarefsky reaped profits for their company by defrauding municipalities and denying them the competition they deserved,” said Sharis A. Pozen, Acting Assistant Attorney General in charge of the Justice Department’s Antitrust Division. “Our investigation into the municipal bond derivatives industry has now led to guilty pleas by 12 financial executives and charges against six others.”

According to court documents, CDR was hired by public entities that issue municipal bonds to act as their broker and conduct what was supposed to be a competitive bidding process for contracts for the investment of municipal bond proceeds. Competitive bidding for those contracts is the subject of regulations issued by the U.S. Department of the Treasury and is related to the tax-exempt status of the bonds.

During his plea, Wolmark admitted that, from 1998 until 2006, he and other co-conspirators favored certain providers when determining which provider would win contracts for investment agreements. Wolmark also admitted that he ensured that certain providers won by soliciting intentionally losing bids from other providers and manipulated bidding in return for unearned or inflated fees. Additionally, Wolmark admitted that he signed certifications that contained false statements regarding whether the bidding process for certain investment agreements complied with relevant Treasury regulations.

Zarefsky admitted that he supplied information to providers to help them win bids, allowed providers to lower their bids and solicited intentionally losing bids from some providers so that other providers could win certain contracts.

“Municipal bonds are issued to fund public works or otherwise serve a public purpose,” said FBI Assistant Director-in-Charge Janice K. Fedarcyk of the New York Field Office. “Bid rigging in the investment of bond proceeds effectively reduces the potential yield on those proceeds, meaning the actions of these defendants had an adverse impact on the public. This wasn’t just self-interest. It was self-interest that ran directly counter to the public interest.”

“Today’s guilty pleas by Zevi Wolmark and Evan Zarefsky represent a milestone in the government’s investigation,” said Special Agent in Charge Charles R. Pine of the Internal Revenue Service-Criminal Investigation (IRS-CI) New York Field Office. “CDR and the firm’s employees have effectively been removed from the municipal bond market and will no longer be able to manipulate and control the bid process for the reinvestment of tax-exempt municipal bond proceeds. This scheme to conceal kickbacks through complex derivative transactions has come to an end. IRS Criminal Investigation will continue to investigate those who violate the law for financial gain at the expense of taxpayers.”

The bid–rigging conspiracy with which Wolmark and Zarefsky are charged carries a maximum penalty of 10 years in prison and a $1 million criminal fine. The fraud conspiracy with which they are charged carries a maximum penalty of five years in prison and a $250,000 criminal fine. The wire fraud charge with which each defendant is charged carries a maximum penalty of 20 years in prison and a $250,000 criminal fine. The maximum fines for each of these offenses may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.

Including today’s guilty pleas, 12 individuals have pleaded guilty in an ongoing federal investigation into the municipal bonds industry, which is being conducted by the Antitrust Division’s New York Field Office, the FBI and IRS-CI.

In addition, Dominick Carollo and Peter S. Grimm, formerly of GE Funding Capital Market Services, and Steven E. Goldberg, formerly of GE Funding Capital Market Services and FSA, were indicted on July 27, 2010, and are scheduled to begin trial in April 2012. Three former UBS employees, Peter Ghavami, Gary Heinz and Michael Welty, were indicted on Dec. 9, 2010."

ATTORNEY CHARGED BY SEC WITH MUNICIPAL BOND FRAUD

The following excerpt is from the Sec website:

“The Securities and Exchange Commission today announced its filing of a civil injunctive action alleging fraud in the offer and sale of municipal bonds by Chalmer E. Detling, II, an attorney based in Atlanta.

Filed December 29, 2011 in the U.S. District Court for the Northern District of Georgia, the SEC’s complaint alleges that Detling made material misrepresentations and omissions in connection with the 2006 offer and sale of $2.96 million of industrial development revenue bonds. Raleigh County, West Virginia issued the bonds in October 2006 to facilitate Aiken Continental, L.L.C.’s acquisition of Continental Casket, Inc., a casket manufacturing facility located within its jurisdiction. In 2006, Detling served as counsel to Aiken Continental and its sole principal, Charles A. Aiken, for purposes of the acquisition, and simultaneously represented Aiken in an unrelated federal criminal proceeding.

According to the SEC’s complaint, Detling failed to disclose to key participants to the transaction, including the issuer, bond counsel, the underwriter, and the bondholders’ trustee, that Aiken had been indicted for financial fraud in late 2005. Detling also failed to disclose that he was in the process of negotiating a plea agreement for Aiken just before the bonds were issued in October 2006. In addition, Detling failed to disclose material information about a $200,000 loan to Aiken and Aiken Continental from a company that was partially owned by Detling, in order to facilitate the closing of the transaction. This loan required a $100,000 interest payment, and gave the lender a twenty percent equity interest in Aiken Continental if the loan plus interest was not fully repaid within six months. Detling’s failure to disclose details about Aiken’s criminal proceeding and the loan rendered certain statements in the bonds’ Official Statement materially misleading. By reviewing the Official Statement, which was distributed to investors in connection with the transaction, and failing to correct the misstatements and omissions therein, the SEC’s complaint alleges that Detling aided and abetted the violations of Aiken and Aiken Continental.

In addition, the SEC’s complaint alleges that Detling signed an opinion letter as counsel to Aiken Continental in which he made false and misleading representations. Specifically, Detling represented that no proceeding at law was pending which would adversely affect Aiken Continental, and that the Official Statement did not contain any untrue statement of material fact or omit any material facts. The SEC’s complaint alleges that these representations were materially false and misleading due to Detling’s failures to disclose material information about Aiken’s criminal proceeding and the loan.
According to the SEC’s complaint, Aiken served 90 days in federal prison and 90 days of home detention in Georgia following the close of the transaction. Aiken’s six-month absence negatively affected the operations of the casket company and the Raleigh County bonds are now in default, with the entire principal amount and accrued interest due.
Without admitting or denying the allegations in the complaint, Detling agreed to settle the SEC’s charges by consenting to the entry of a final judgment, which will permanently enjoin him from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and from aiding and abetting violations of Exchange Act Section 10(b) and Rule 10b-5. As part of the settlement, Detling also agreed to pay $10,000 in disgorgement, $3,052 in prejudgment interest, and a $25,000 civil penalty, all of which will be distributed on a pro rata basis to Raleigh County bondholders. The SEC’s settlement with Detling is subject to court approval. In addition, pursuant to Rule 102(e)(3) of the Commission’s Rules of Practice, Detling consented to the entry of an administrative order suspending him from appearing or practicing before the Commission as an attorney, with the right to reapply after five years.”

BEVERLY HILLS FINANCIAL FIRM AND FOUNDER PLEAD GUILTY TO BID-RIGGING IN MUNI BOND MARKET

The following excerpt is from the Department of Justice website:

"WASHINGTON – A Beverly Hills, Calif.,-based financial products and services firm, and its founder and owner pleaded guilty today in the Southern District of New York for their participation in bid-rigging and fraud conspiracies related to contracts for the investment of municipal bond proceeds and other related municipal finance contracts, the Department of Justice announced. 

Rubin/Chambers, Dunhill Insurance Services, also known as CDR Financial Products, and David Rubin, CDR founder and owner, pleaded guilty before U.S. District Judge Victor Marrero in the Southern District of New York.  Rubin and CDR, along with Zevi Wolmark, also known as Stewart Wolmark, the former chief financial officer and managing director of CDR, and Evan Andrew Zarefsky, a vice president of CDR, were indicted on Oct. 29, 2009.  The trial for Wolmark and Zarefsky is scheduled to begin on Jan. 3, 2012, in the Southern District of New York.

Rubin and CDR each pleaded guilty to participating in separate bid-rigging and fraud conspiracies with various financial institutions and insurance companies and their representatives.  These institutions and companies, or “providers,” offered a type of contract, known as an investment agreement, to state, county and local governments and agencies throughout the United States.  The public entities were seeking to invest money from a variety of sources, primarily the proceeds of municipal bonds that they had issued to raise money for, among other things, public projects.  Rubin and CDR also pleaded guilty to one count of wire fraud in connection with those schemes.

“Mr. Rubin and his company engaged in fraudulent and anticompetitive conduct that harmed municipalities and other public entities,” said Sharis A. Pozen, Acting Assistant Attorney General in charge of the Justice Department’s Antitrust Division.  “Today’s guilty pleas are an important development in our continued efforts to hold accountable those who violate the antitrust laws and subvert the competitive process in our financial markets.”

According to court documents, CDR was hired by public entities that issue municipal bonds to act as their broker and conduct what was supposed to be a competitive bidding process for contracts for the investment of municipal bond proceeds.  Competitive bidding for those contracts is the subject of regulations issued by the U.S. Department of the Treasury and is related to the tax-exempt status of the bonds.

During his plea hearing, Rubin admitted that, from 1998 until 2006, he and other co-conspirators supplied information to providers to help them win bids, solicited intentionally losing bids, and signed certifications that contained false statements regarding whether the bidding process for certain investment agreements complied with relevant Treasury Regulations.  Additionally, Rubin admitted that he and other co-conspirators solicited fees from providers, which were in fact payments to CDR for rigging or manipulating bids for certain investment agreements so that a particular provider would win that agreement at an artificially determined price. 

“Mr. Rubin and his firm were trusted with public money and confidence to assist municipalities with issuing bonds,” said FBI Assistant Director in Charge Janice K. Fedarcyk.  “Contrary to his agreement and the law, Mr. Rubin shirked his responsibilities while defrauding taxpayers.  Thankfully, this bid-rigging scheme, where Mr. Rubin decided the winners and losers, is over.”

“ IRS is the federal agency responsible for compliance with tax laws applicable to the issuance of tax-exempt municipal bonds,” said Special Agent in Charge Charles R. Pine of the Internal Revenue Service-Criminal Investigation (IRS-CI) New York Field Office .  “Today’s guilty pleas by David Rubin and CDR are the result of a coordinated effort by the Department of Justice and IRS-Criminal Investigation.  Depriving municipalities of investment earnings and diverting arbitrage via illegal agreements and kickbacks will not be tolerated.  IRS-Criminal Investigation agents will continue to investigate fraud in the municipal bond market and recommend prosecution against those who have participated in the fraudulent scheme.”      

The bid–rigging conspiracy with which Rubin is charged carries a maximum penalty of 10 years in prison and a $1 million criminal fine.  The fraud conspiracy with which Rubin is charged carries a maximum penalty of five years in prison and a $250,000 criminal fine.  The wire fraud charge with which Rubin is charged carries a maximum penalty of 20 years in prison and a $250,000 criminal fine.  The maximum fines for each of these offenses may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.

CDR faces a maximum criminal fine on the bid-rigging charge of $100 million.  The fraud conspiracy and wire fraud offenses with which CDR is charged each carry a maximum criminal fine of $500,000.  The maximum fines for each of these offenses may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.

Rubin is the tenth individual to plead guilty in an ongoing federal investigation into the municipal bonds industry, which is being conducted by the Antitrust Division’s New York Field Office, the FBI and IRS-CI. 

In addition, Dominick Carollo and Peter S. Grimm, formerly of GE Funding Capital Market Services, and Steven E. Goldberg, formerly of GE Funding Capital Market Services and FSA, were indicted on July 27, 2010, and are scheduled to begin trial in April 2012.  Three former UBS employees, Peter Ghavami, Gary Heinz and Michael Welty, were indicted on Dec. 9, 2010."

IS THE SEC STRENGTHENING PROTECTIONS FOR MUNI BOND PURCHASERS?:

The following is an excerpt from the SEC website: "What is the SEC doing to strengthen protections for municipal bond investors? Public companies that issue stocks are required to provide ongoing disclosure to the SEC and to investors. In contrast, most offerings by municipal issuers are exempt from the provisions of federal law requiring filings with the SEC. However, for most municipal securities issued after July 3, 1995, annual financial information and operating data, as well as notice of certain events, is required by SEC dealer regulations to be filed with the Municipal Securities Rulemaking Board and is available at no charge to investors at www.emma.msrb.org. Improved disclosure is underway: the SEC approved changes to its rules in May 2010 designed to increase the quality and timeliness of disclosure about municipal bonds, including newly issued variable rate demand obligations. Those changes are slated to take effect on the compliance date of December 1, 2010. Beginning in September, the SEC staff will hold field hearings to gather input from municipal market participants. Some of the topics to be considered include: disclosures in official statements when municipal bonds are first issued; the availability of continuing information on municipal bonds; accounting practices, including whether the bond issuer prepares its financial statements in accordance with the standards set by the Government Accounting Standards Board, or GASB; and sales practices and potential conflicts of interest. The hearings will help inform a planned SEC staff report that will recommend ways to better protect municipal bond invesTORS."

UBS AGREES TO PAY $160 MILLION IN MUNICIPAL BOND FRAUD CASE

The following is an excerpt from the Department of Justice web site:

"WASHINGTON — UBS AG has entered into an agreement with the Department of Justice to resolve anticompetitive activity in the municipal bond investments market and has agreed to pay a total of $160 million in restitution, penalties and disgorgement to federal and state agencies, the Department of Justice announced today.

As part of its agreement with the department, UBS admits, acknowledges and accepts responsibility for illegal, anticompetitive conduct by its former employees. According to the non-prosecution agreement, from 2001 through 2006, certain former UBS employees at its municipal reinvestment and derivatives desk and related desks, entered into unlawful agreements to manipulate the bidding process and rig bids on municipal investment contracts. These contracts were used to invest the proceeds of, or manage the risks associated with, bond issuances by municipalities and other non-profit entities.

"UBS and its former executives engaged in illegal conduct that corrupted the competitive process and harmed municipalities, and ultimately taxpayers, nationwide," said Assistant Attorney General Christine Varney. "Today's agreements with UBS ensure that restitution is paid to the victims of the anticompetitive conduct, that UBS pays penalties and disgorges its ill-gotten gains. The Antitrust Division will continue to use every tool at our disposal to root out illegal activity in financial markets that disrupts the competitive process."

Under the terms of the agreement, UBS agrees to pay restitution to victims of the anticompetitive conduct and to cooperate fully with the Justice Department's Antitrust Division in its ongoing investigation into anticompetitive conduct in the municipal bond derivatives industry. To date, the ongoing investigation has resulted in criminal charges against 18 former executives of various financial services companies and one corporation. Four of these charged executives are former UBS employees: Mark Zaino, Peter Ghavami, Gary Heinz and Michael Welty. Nine of the 18 executives charged have pleaded guilty, including Mark Zaino.

The Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS) and 25 state attorneys general also entered into agreements with UBS requiring the payment of penalties, disgorgement of profits from the illegal conduct and payment of full restitution to the victims harmed by the manipulation and bid rigging by UBS employees.

As a result of UBS's admission of conduct; its cooperation with the Department of Justice and the SEC, the IRS and the state attorneys general; its monetary and non-monetary commitments to the SEC, IRS and state attorneys general; and its remedial efforts to address the anticompetitive conduct, the department agreed not to prosecute UBS for the manipulation and bid rigging of municipal investment contracts, provided that UBS satisfies its ongoing obligations under the agreement.

In December 2010, Bank of America agreed to pay a total of $137.3 million in restitution to federal and state agencies for its participation in anticompetitive conduct in the municipal bond derivatives market.

The department's ongoing investigation into the municipal bonds industry is being conducted by the Antitrust Division, the FBI and the IRS Criminal Investigation. The department is coordinating its investigation with the SEC, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Bank of New York.

The Antitrust Division, SEC, IRS, FBI, state attorneys general, OCC and Federal Reserve Bank are members of the Financial Fraud Enforcement Task Force. President Obama established the interagency task force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes. For more information about the task force, visit www.stopfraud.gov."

SEC CHARGES UBS FINANCIAL SERVICES INC. WITH FRAUD

Whenever there are large sums of money involved financial companies will seem to always find a way to rig financial markets to the detriment of investors, tax payers and, customers. The case below is from the SEC web site. In this case the SEC alleges that UBS Financial Services Inc., committed fraud by bid-rigging in the municipal bond market:

“ Washington, D.C., May 4, 2011 — The Securities and Exchange Commission today charged UBS Financial Services Inc. (UBS) with fraudulently rigging at least 100 municipal bond reinvestment transactions in 36 states and generating millions of dollars in ill-gotten gains.

To settle the SEC’s charges, UBS has agreed to pay $47.2 million that will be returned to the affected municipalities. UBS and its affiliates also agreed to pay $113 million to settle parallel cases brought by other federal and state authorities.
When investors purchase municipal securities, the municipalities generally temporarily invest the proceeds of the sales in reinvestment products before the money is used for the intended purposes. Under relevant IRS regulations, the proceeds of tax-exempt municipal securities must generally be invested at fair market value. The most common way of establishing fair market value is through a competitive bidding process in which bidding agents search for the appropriate investment vehicle for a municipality.
The SEC alleges that during the 2000 to 2004 time period, UBS’s fraudulent practices and misrepresentations undermined the competitive bidding process and affected the prices that municipalities paid for the reinvestment products being bid on by the provider of the products. Its fraudulent conduct at the time also jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted. The business unit involved in the misconduct closed in 2008 and its employees are no longer with the company.
According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, UBS played various roles in these tainted transactions. UBS illicitly won bids as a provider of reinvestment products, and also rigged bids for the benefit of other providers while acting as a bidding agent on behalf of municipalities. UBS at times additionally facilitated the payment of improper undisclosed amounts to other bidding agents. In each instance, UBS made fraudulent misrepresentations or omissions, thereby deceiving municipalities and their agents.
“Our complaint against UBS reads like a ‘how-to’ primer for bid-rigging and securities fraud,” said Elaine C. Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit. “They used secret arrangements and multiple roles to win business and defraud municipalities through the repeated use of illegal courtesy bids, last looks for favored bidders, and money to bidding agents disguised as swap payments.”
According to the SEC’s complaint, UBS as a bidding agent steered business through a variety of mechanisms to favored bidders acting as providers of reinvestment products. In some cases, UBS gave a favored provider information on competing bids in a practice known as “last looks.” In other instances, UBS deliberately obtained off-market ”courtesy” bids or arranged “set-ups” by obtaining purposefully non-competitive bids from others so that the favored provider would win the business. UBS also transmitted improper, undisclosed payments to favored bidding agents through interest rate swaps. In addition, UBS was favored to win bids with last looks and set-ups as a provider of reinvestment products.
In a related enforcement action, the SEC barred former UBS officer Mark Zaino from associating with any broker, dealer or investment adviser, based upon his guilty plea last year in a criminal case charging him with two counts of conspiracy and one count of wire fraud for engaging in misconduct in the competitive bidding process involving the investment of proceeds of tax-exempt municipal bonds. The Commission recognizes Zaino’s cooperation in the SEC’s investigation as well as investigations conducted by other law enforcement agencies.
Without admitting or denying the allegations in the SEC’s complaint, UBS has consented to the entry of a final judgment enjoining it from future violations of Section 15(c) of the Securities Exchange Act of 1934. UBS has agreed to pay a penalty of $32.5 million and disgorgement of $9,606,543 with prejudgment interest of $5,100,637. The settlement is subject to court approval.
This is the SEC’s second settlement with a major bank in an ongoing investigation into corruption in the municipal reinvestment industry. In December 2010, the SEC charged Banc of America Securities LLC (BAS) with securities fraud for similar conduct. In that matter, BAS agreed to pay more than $36 million in disgorgement and interest to settle the SEC’s charges, and paid an additional $101 million to other federal and state authorities for its misconduct.
The SEC thanks the Antitrust Division of the Department of Justice and the Federal Bureau of Investigation for their cooperation and assistance in this matter. The SEC is bringing this enforcement action in coordination with the Department of Justice, Internal Revenue Service and 25 State Attorneys General.
The SEC’s investigation is continuing.”

The SEC seems to be very aggressive in it’s prosecution of bad guys. However, perhaps instead of levying a relatively small fine against these large institutions the SEC should be allowed to confiscate all of the shareholder and bond holder equity in these businesses. Fines seem to be having no deterrent value so perhaps only the complete loss of equity will get share holders and bond holders in these financial institutions to pay attention to what executives are doing in the name of the owners and chief creditors.

SEC CHARGES THE STATE OF NEW JERSEY WITH FRAUD

The following case involves the State of New Jersey selling municipal bonds that were in financial jeopardy of never paying off at the time the municipal bonds were sold. It seems that for several years New Jersey has been under funding two huge retirement programs; namely its pension program for teachers and the one they had for public employees. This under funding places New Jersey on the road to bankruptcy unless it does something drastic to curb its expenses. Municipal bonds are supposed to be a safe investment but, the inability of state and local governments to curb spending may spell the demise of the muni bonds. The following is an excerpt from the SEC web page which will go into detail regarding the case and the specific laws New Jersey violated:

“Washington, D.C., Aug. 18, 2010 — The Securities and Exchange Commission today charged the State of New Jersey with securities fraud for misrepresenting and failing to disclose to investors in billions of dollars worth of municipal bond offerings that it was under funding the state's two largest pension plans.

According to the SEC's order, New Jersey offered and sold more than $26 billion worth of municipal bonds in 79 offerings between August 2001 and April 2007. The offering documents for these securities created the false impression that the Teachers' Pension and Annuity Fund (TPAF) and the Public Employees' Retirement System (PERS) were being adequately funded; masking the fact that New Jersey was unable to make contributions to TPAF and PERS without raising taxes, cutting other services or otherwise affecting its budget. As a result, investors were not provided adequate information to evaluate the state's ability to fund the pensions or assess their impact on the state's financial condition.

New Jersey is the first state ever charged by the SEC for violations of the federal securities laws. New Jersey agreed to settle the case without admitting or denying the SEC's findings.

"All issuers of municipal securities, including states, are obligated to provide investors with the information necessary to evaluate material risks," said Robert Khuzami, Director of the SEC's Division of Enforcement. "The State of New Jersey didn't give its municipal investors a fair shake, withholding and misrepresenting pertinent information about its financial situation."

Elaine C. Greenberg, Chief of the SEC's Municipal Securities and Public Pensions Unit, added, "Issuers of municipal bonds must be held accountable when they seek to borrow the public's money using offering documents containing false and misleading information. New Jersey hid its financial challenges from the very people who are most concerned about the state's financial health when investing in its future."
The SEC's order finds that New Jersey made material misrepresentations and omissions about the under funding of TPAF and PERS in such bond disclosure documents as preliminary official statements, official statements, and continuing disclosures. Among New Jersey's material misrepresentations and omissions:
Failed to disclose and misrepresented information about legislation adopted in 2001 that increased retirement benefits for employees and retirees enrolled in TPAF and PERS.
Failed to disclose and misrepresented information about special Benefit Enhancement Funds (BEFs) created by the 2001 legislation initially intended to fund the costs associated with the increased benefits.
Failed to disclose and misrepresented information about the state's use of the BEFs as part of a five-year "phase-in plan" to begin making contributions to TPAF and PERS.
Failed to disclose and misrepresented information about the state's alteration and eventual abandonment of the five-year phase-in plan.

The SEC's order further finds that New Jersey failed to provide certain present and historical financial information regarding its pension funding in bond disclosure documents. The state was aware of the under funding of TPAF and PERS and the potential effects of the under funding. Furthermore, the state had no written policies or procedures about the review or update of the bond offering documents and the state did not provide training to its employees about the state's disclosure obligations under accounting standards or the federal securities laws. Due to this lack of disclosure training and inadequate procedures for the drafting and review of bond disclosure documents, the state made material misrepresentations to investors and failed to disclose material information regarding TPAF and PERS in bond offering documents.

The SEC's order requires the State of New Jersey to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. New Jersey consented to the issuance of the order without admitting or denying the findings. In determining to accept New Jersey's offer to settle this matter, the Commission considered the cooperation afforded the SEC's staff during the investigation and certain remedial acts taken by the state.”

Some of the problems New Jersey had were in regard to the improper training of employees. Of course many times managers will look the other way when overly aggressive employees are achieving great sales results even though representations are puffery and sometimes just a big lie. Issuing mortgages to people who have no jobs might be the best example of employees being too aggressive to sell a product and managers happy to look the other way.

Now if the municipal bond industry is as fraught with fraud as the mortgage industry then many cities and states and even the nation may have some dire times ahead. Since most areas of America have no industrial base there is no way for governments to raise large amounts of money except by borrowing it through municipal bonds while awaiting some sort of miracle to bring manufacturing back to their communities.