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May 09, 2013 at 10:02 AM
The SEC recently filed charges against four traders for bribing a Venezuelan official with millions, against the gatekeepers of two mutual fund trusts for inaccurate or misleading fund disclosures, and against the city of Harrisburg, Pa., for securities fraud.
Harrisburg, Pa., Charged with Securities Fraud
The SEC charged the city of Harrisburg, Pa., with securities fraud for making misleading public statements when its financial condition was deteriorating and financial information available to municipal bond investors was either incomplete or outdated. It is the first time that a municipality has been charged by the SEC for misleading statements made outside of its securities disclosure documents.
The statements were made in the city’s budget report, annual and midyear financial statements, and a State of the City address—all of which implied that the city was in considerably better financial shape than was actually the case.
Harrisburg, which is nearly bankrupt, is under state receivership thanks in the main to about $260 million in debt that it had guaranteed for upgrades and repairs to a municipal resource recovery facility owned by The Harrisburg Authority. As of March 15, Harrisburg has missed approximately $13.9 million in general obligation debt service payments.
Harrisburg failed to comply with requirements to provide investors with ongoing financial information and audited financial statements. These investors held bonds totaling hundreds of millions of dollars—all of which were either issued or guaranteed by the city. The lack of accurate information available from conventional city sources from 2009 to 2011 compelled investors to seek information elsewhere. However, precious little accurate data was available from other public sources, and some of what was available was seriously in error—such as the 2009 budget misstating Harrisburg’s credit as being rated “Aaa” by Moody’s, when Moody’s had already downgraded Harrisburg’s general obligation credit rating to Baa1 by December 2008.
Information on the city’s website in addition to the budget, such as the 2009 State of the City address and 2009 midyear fiscal report, also either misstated or failed to disclose similarly critical information aboutHarrisburg’s financial condition and credit ratings.
Harrisburg has neither admitted nor denied the SEC’s findings, but the SEC has issued an order for the city to cease and desist the violations. The agency has taken into account the city’s cooperation and the actions it has taken to avoid future violations in framing its settlement.
The SEC has also issued a report addressing disclosure obligations of public officials, as well as their potential liability under federal securities laws for public statements made in the secondary market for municipal securities.
Huge Kickback Scheme Nets Venezuelan Official Millions; Traders Charged
The SEC charged four traders tied to a New York City brokerage for their part in a kickback scheme in which they paid millions of dollars to an important Venezuelan finance official in an attempt to win the bond trading business of a state-owned Venezuelan bank.
Tomas Alberto Clarke Bethancourt, executive vice president of broker-dealer Direct Access Partners (DAP); along with a Panamanian resident, Iuri Rodolfo Bethancourt; and a husband and wife, Jose Alejandro Hurtado and Haydee Leticia Pabon, residents of Miami, all played a part in a massive setup in which the global markets group at DAP executed fixed income trades for customers in foreign sovereign debt, the SEC said.
