City of Harrisburg Charged for Fraudulent Public Statements (with Lofchie Comment)

The SEC charged the City of Harrisburg, Pennsylvania with securities fraud for misleading public statements made by city officials when the city's financial condition was deteriorating and financial information available to municipal bond investors was either incomplete or outdated. The SEC’s order requires Harrisburg to cease and desist from committing or causing violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Harrisburg agreed to settle the charges. This is the first time that the SEC has charged a municipality for misleading statements made outside of its securities disclosure documents.

In addition, the SEC issued a Report of Investigation pursuant to Section 21(a) of the Exchange Act to address the obligations of public officials relating to their secondary market disclosures for municipal securities. The report notes that public officials should understand that public statements, if they are materially misleading or omit material information, can lead to potential liability under the antifraud provisions of the federal securities laws.

Lofchie Comment: Here is the key sentence from the Section 21(a) Report: "As a result of an investigation conducted by the staff of the Division of Enforcement, the Commission found that certain public statements made during a two-year period misrepresented and omitted to state material information regarding Harrisburg’s deteriorating financial condition and credit ratings downgrades, thereby violating the antifraud provisions of the Exchange Act."In other words, material misstatements or omissions by public officials may violate the securities laws, particularly where those public officials are acting on behalf of governmental entities that are in financial distress. Given the number of governmental entities in distress, this may be a significant political, as well as securities law, development. (See also below for two other recent fraud actions against governmental entities, one against Illinois and the other against the City of Victorville.).

See: SEC Order.See also: Press Release.Related News Items: SEC Charges Illinois for Misleading Pension Disclosures (with Lofchie Comment); SEC Charges City of Victorville and Others with Defrauding Municipal Bond Investors (with Lofchie Comment).