The Securities and Exchange Commission has broken new regulatory ground. The SEC charged the State of New Jersey on Wednesday, August 18, with securities fraud for misrepresenting and failing to disclose to investors in billions of dollars worth of municipal bond offerings that it was underfunding 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. The agency did not impose a financial penalty.
“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, in a statement. “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.”