1. SEC Enforcement in Municipal Public Finance Illinois Municipal League 104th Annual Conference
Eric Celauro, U.S. Securities and Exchange Commission
Kelly Kost, Chapman and Cutler LLP
Bob Lewis, PMA Securities, Inc.
Ken Yeadon, Hinshaw & Culbertson LLP
September 22, 2017
3:30 PM

2. Why Scrutiny Over Municipal Disclosure By the SEC?
Retail investor market participation
Financial Crisis
A few bad, public bankruptcies
Congressional pressure  Dodd-Frank Act
SEC created a specialized unit for municipal securities and public pensions
Increased transparency and access to information for market participants

3. Primary Market Disclosure - Overview
The official statement is a document prepared by, or on behalf of, the Issuer in connection with a primary offering of its bonds.
The official statement discloses all material information on the offering for potential investors.
The official statement is the main source of anti-fraud liability in a municipal transaction.

4. Legal Framework - SEC Law & Rules
Anti-Fraud Provisions
’34 Act – Section 10 & Rule 10b-5; ’33 Act – Section 17(a)
Prohibits fraud in the offer or sale of securities
Unlawful to make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading
Control Person Liability
‘34 Act – Section 20(a)
Any person who directly or indirectly “controls” another person found liable for a violation of the ‘34 Act is jointly and severally liable, to the same extent as the controlled person, to any person to whom the controlled person is liable
SEC Rule 15c2-12
Requires underwriters of municipal securities to:
Obtain, review and disseminate an official statement
Ensures that Issuer has undertaken (contracted) to provide certain continuing disclosures to the market (Continuing Disclosure Undertaking or CDU)

5. Public Finance Abuse Unit
The Unit investigates and litigates cases involving violations of the federal securities laws, specifically those matters concerning municipal bonds and public pensions.
The Unit is made up of approximately 30 attorneys, experts, and staff from SEC offices around the country (with 4 people in Chicago).
It is one of 5 specialty units created in 2010 in response to the financial crisis.
Priorities of the Unit
How investigations are started

6. SEC Municipal Enforcement Actions Town of Ramapo, New York
Christopher St. Lawrence, the former Director of Finance for Ramapo, New York, was found guilty of 20 counts of conspiracy, securities fraud and wire fraud in connection with municipal bonds issued by Ramapo and by the Ramapo Local Development Corporation, a development corporation associated with the town.
The SEC cited one prominent example of fraud when St. Lawrence misled a rating agency about the town’s general fund balance. St. Lawrence told the credit rating agency on a phone call that Ramapo experienced “increased fund balances across the board, and had a stable balance in the general fund” for fiscal year Immediately after the call, St. Lawrence said to Ramapo officials, “Listen I’m going to tell you this right now. We need to do this [upcoming] refinancing of the short term [RLDC] debt as fast as possible, because … we’re going to have to all be magicians to get to some of those numbers.”
First Federal criminal securities fraud prosecution and conviction involving municipal bonds.
The jury rejected two of St. Lawrence’s arguments that no investors were harmed as all of the bonds were at all times fully and timely paid, and that St. Lawrence received no personal financial gain in connection with the alleged fraudulent activity.
Andrew J. Ceresney, Director of the SEC Enforcement Division, said, “We won’t stand for public officials and employees who resort to alleged accounting trickery to mislead investors who are investing in their financial futures as well as the future betterment of our communities.”

7. SEC Municipal Enforcement Actions City of Miami
In a jury trial, the City of Miami and the Budget Director were held liable for violating federal antifraud securities laws. The City agreed to pay the SEC $1 million to settle the case. The Budget Director was ordered to pay a $15,000 penalty.
Prior to 2009, Miami transferred money from its Capital Project Funds to its General Fund to mask General Fund deficits. In bond offering documents, the City did not fully disclose the effect or the amounts of the transfers to the General Fund, which totaled $38 million. In addition, the City represented that the transfers from the Capital Project Funds were “unexpended” or “unused” when some funds had already been allocated to specific projects or had already been spent. Such misrepresentations were also included in the City’s CAFRs.
The first federal jury trial by the SEC against a municipality or one of its officers for violating federal securities laws.

8. SEC Municipal Enforcement Actions Westlands Water District, California
Sanctioned: Westlands Water District ($125,000), Thomas Birmingham (General Manager) ($50,000), Louie David Ciapponi (Assistant General Manager) ($20,000)
Disclosure Problem: Westlands agreed in prior bond offerings to maintain a 1.25 debt service coverage ratio. Westlands learned in 2010 that drought conditions and reduced water supply would prevent the water district from generating enough revenue to maintain a 1.25 ratio. In order to meet the 1.25 ratio without raising rates on water customers, Westlands used extraordinary accounting transactions (“a little Enron accounting”) that reclassified funds from reserve accounts to record additional revenue. When Westlands issued the $77 million bond offering in 2012, it represented to investors that it met or exceeded the 1.25 ratio for each of the prior five years.
In preparing disclosure documents, issuers and their officials should look behind the numbers and assess the facts to determine if additional information would be material to investors and thus warranted under federal anti-fraud provisions.

9. SEC Municipal Enforcement Actions City of Allen Park, Michigan
An SEC investigation into the city’s sale of $31 million in general obligation bonds, sold to support a movie studio project, found that the offering documents provided to investors contained false and misleading statements about the scope and viability of the proposed project and about the overall financial condition of Allen Park at the time the bonds were offered to investors.
Two former Allen Park municipal officials were included in the SEC charges, including the former city mayor. The SEC alleges that the ex-mayor was an “active champion” of the failed project and additionally that he was in a position to control the actions of the city and the city administrator. Based on this “control” the SEC held the former mayor accountable for the violations committed by the city and the city administrator.
The former mayor agreed to settle the SEC’s charges and, among other conditions, paid a $10,000 penalty.
The first instance in which the SEC charged a municipal officer under a federal statute which creates liability for a “control person”.

10. SEC Municipal Enforcement Actions City of Harvey, Illinois
Sanctioned: Eric J. Kellogg, Mayor of Harvey
Disclosure Problem: Investors were told that their money would be used to develop and construct a Holiday Inn hotel in Harvey, but instead city officials diverted at least $1.7 million in bond proceeds to fund the city’s payroll and other operational costs unrelated to the hotel project
Mayor Kellogg exercised control over Harvey’s operations and signed important offering documents the city used to offer and sell the bonds; based on his control of the city, Kellogg is liable for fraud as a control person under Section 20(a) of the Securities Exchange Act.
Sanction: Mayor of Harvey agreed to pay $10,000 and never again participate in bond offerings
The Harvey case was unique in that the SEC sought and received an emergency court order to halt a municipal bond offering when it became clear that Harvey intended to issue more bonds while the SEC was conducting its investigation.

11. Obligations of Issuers
The Official Statement is the issuer’s document.
The obligation for the accuracy and completeness of the disclosure lies with the issuer.
The process of revising and updating disclosure should not be viewed as a mechanical insertion of more current numbers. While it is not anticipated that there necessarily will be major changes in the form and content of the disclosure at the time of each update, everyone involved in the process should consider the need for revisions in the form and content of the sections for which they are responsible at the time of each update.
An issuer’s obligations go beyond just paying its bonds—even if debt service on bonds is being paid, the SEC can bring an enforcement action.

12. Due Diligence Calls Process: Questions regarding:
Issuer is provided a copy of the Preliminary Official Statement in advance of the call for review
Underwriter/FA, Counsel and the Issuer on the call
Review/acknowledge completed Due Diligence Questionnaire
Questions regarding:
Accuracy of POS
Changes in financial affairs since Financial Statements
Audits, investigations, litigation
Employees and employee relations
Major taxpayer/employer status
Issuer should raise “material” issues not covered by questions

13. Disclosure Policies and Procedures
Main components: Designating a disclosure officer; adopting procedures for primary disclosure (official statements), for producing and filing annual financial information on EMMA and filing Reportable Events on EMMA.
Incorporating robust disclosure practices/procedures and demonstrating a solid disclosure track record benefits an issuer by encouraging regulatory compliance and by enhancing credibility among investors, credit rating agencies and the public.
All participants in the disclosure process should be encouraged to raise additional potential disclosure items at all times in the process.
Disclosure questions should be discussed with appropriate management team members.
While care should be taken not to shortcut or eliminate any steps outlined in Disclosure Policies and Procedures on an ad hoc basis, the review and maintenance of the disclosure is a fluid process and recommendations for improvement in Disclosure Policies and Procedures should be solicited and regularly considered.

14. Questions? 13