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.