The US Securities and Exchange Commission (SEC) [official website] announced [press release] Wednesday that it has charged [order, PDF] the state of New Jersey with securities fraud for failing to disclose to municipal bond investors that it was underfunding two of the state's largest pension plans. Between August 2001 and August 2007, New Jersey sold more than $26 billion in municipal bonds and in the 79 offerings misrepresented material information in regard to the Teachers' Pension and Annuity Fund (TPAF) and the Public Employees' Retirement System (PERS) [official websites] in violation of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 [text, PDF; Cornell LII backgrounder]. New Jersey failed to disclose that it was underfunding TPAF and PERS in official preliminary disclosures, official statements and continuing disclosures, while creating a false impression that the pension plans were being adequately funded. SEC Chief of the Municipal Securities and Public Pensions Unit Elaine C. Greenberg stated:
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.The SEC initiated its inquiry into New Jersey's bond offerings in April 2007, and, following the investigation, the state disclosed the inquiry on subsequent bond disclosure documents. Specifically, New Jersey omitted pertinent information regarding 2001 legislation [A3506 text] that increased retirement benefits for employees and retirees enrolled in TPAF and PERS and established Benefit Enhancement Funds (BEF) to cover the costs associated with the increased benefits. Also, the state did not adequately disclose details regarding the use of a five-year "phase-in-plan" to begin making contributions to TPAF and PERS. According to the New Jersey Office of the Attorney General [official website], in the Spring of 2007, the State took remedial actions [press release] set forth in the SEC order by employing an independent counsel to advise the State of its disclosure obligations and update and clarify pension disclosures on bond offering documents. Also, New Jersey established formal disclosure policies, procedures, and training programs and created a committee to oversee the disclosure process. New Jersey, the first state ever charged with securities fraud by the SEC, has agreed to settle the case without admitting or denying the findings.
In a similar case, the SEC sued [JURIST report] five former San Diego city officials in 2008, alleging they committed securities fraud by failing to disclose funding shortfalls in the city's pension and health care plans to potential buyers and sellers of San Diego's municipal bonds. An independent audit conducted in 2006 uncovered numerous securities law violations [JURIST report] and recommended that an independent monitor supervise the San Diego pension system and report back to the SEC, and that city officials be required to personally certify the accuracy of pension reports, a requirement that the Sarbanes-Oxley Act [text, PDF; SEC materials] imposed on corporations in the wake of the Enron scandal [JURIST news archive]. The audit also criticized outside consultants hired by San Diego to administer the pension plan for failing to fully investigate problems with the pension system.