The statement is a strong one.
“The State of New Jersey didn’t give its municipal investors a fair shake, withholding and misrepresenting pertinent information about its financial situation.”
So said Robert Khuzami, director of the division of enforcement at The Securities and Exchange Commission. The occasion: the watchdog agency for the first time charged one of the 50 states with violations of federal securities laws.
New Jersey agreed to settle the case, without admitting or denying the SEC claims.
The penalty to New Jersey for selling more than $26 billion (with a b) tax-free bonds in 79 separate offerings in a six-year period ending in April 2007 while allegedly omitting or misrepresenting some material facts about New Jersey’s finances: agreeing to “cease and desist” from future violations of specific securities statutes.
The remedy for all the investors who bought municipal securities from New Jersey in 79 separate offerings during six years and were, according to the SEC, left in the dark about some crucial state pension underfunding: nothing that can be found in the SEC press release or in the SEC’s order.
No individuals who were employed by the state of New Jersey from April 2001 to April 2007, when these misdeeds allegedly took place, are named in the SEC documents.
Specifically, New Jersey “misrepresented and failed to disclose material information regarding its under funding of New Jersey’s two largest pension plans …” the SEC said.
New Jersey “created the fiscal illusion” the pension pools were being adequately funded when, in fact, the state couldn’t make those needed contributions “without raising taxes or cutting other services, or otherwise impacting the budget,” the SEC said.
In other words, during all those 79 offerings New Jersey gave a more favororable impression of its fiscal fortunes than was warranted. It’s hard to imagine anything more relevant to an investor in a state’s municipal bonds than accurate information about the state’s fiscal situation.
The dry legal language of the SEC doesn’t mask the allegedly shocking lack of proper procedures to bring a bond to market during this period in New Jersey.
“Prior to the release of an official statement, the State Treasurer, or his designee, signed a Rule 10b-5 certification, certifying that the official statement did not contain any material misrepresentations or omissions,” the SEC said. “During the relevant time period, the Treasurers did not read official statements and relied on their staff to ensure the accuracy of information contained in the documents.”
If that were not enough, the SEC continued, New Jersey’s Treasury “had no written policies or procedures relating to the review or update of bond offering documents. In addition, Treasury did not provide training to its employees concenrrning the State’s disclosure obligations…”
Since 2007, the SEC said New Jersey has improved, hiring expert lawyers and reviewing and enhancing its disclosure processes and training.
It’s hard to imagine that fact, or the state’s agreement to “cease and desist,” will provide much comfort to the individuals who bought New Jersey’s tax-free bonds in those six years.