In last week’s post, we discussed a number of recent enforcement efforts against municipal governments, brought by officials at the U.S. Securities and Exchange Commission. This week, it appears to be the city of South Miami’s turn. SEC officials recently charged the city with securities fraud.
Specifically, SEC officials claim that city leaders failed to disclose to investors issues that might affect the tax-exempt status of two of its municipal bonds. The issue is significant, as investors often base risk assessment and other investment profiling on a security’s tax classification. Tax-exempt bonds typically pay lower interest rates because investors benefit in other ways, such as tax-free interest payments and the ease of mind that comes from owning bonds.
The bonds, issued by the Florida Municipal Loan Council, were used to raise revenue needed to start construction on a local retail and parking structure. However, city leaders admitted to lending some of the proceeds to a private developer, as well as restructuring a lease agreement. SEC officials believe both of those actions could have disqualified the bonds from their tax-exempt status.
City leaders recently settled the SEC charges by hiring an independent consultant to manage the municipal bonds. However, the fact that even local government officials can be charged with failing to make material financial disclosures might give many investors pause. Investment decisions cannot be wisely made unless a client is provided with all publicly available knowledge. Thanks to the work of SEC officials and individual securities fraud attorneys, securities can be held accountable for any fraud.
Source: newsandinsight.thomsonreuters.com, “SEC charges South Miami with fraud over debt deals,” Lisa Lambert, May 22, 2013