Articles Posted in Municipal Securities

Bloomberg/BNA reports that according to sources, efforts by the Securities and Exchange Commission to come down harder on violations of municipal securities disclosures will soon include the filing of enforcement cases against the issuers of those securities. The regulator’s Municipalities Continuing Disclosure Cooperation (MCDC) initiative had pressed municipal securities issuers and underwriters to self-report previous violations by 12/1/14. Incentive for those efforts included more uniform and less severe sanctions in subsequent enforcement actions.

Issuers and underwriters are required to give the SEC information about previous municipal securities offerings they were involved in that may have included statements that were potentially inaccurate. Unfortunately, issuers and underwriters often do not completely comply with SEC rules about the accuracy of disclosures that are meant to increase investor protections. The initiative was an attempt to deal with such lapses.

Also, in 2014, the SEC announced just one MCDC enforcement case. The action accused Kings Canyon Joint Unified School District of misleading investors because of its failure to provide them with financial data and notices that they were contractually obligated to give out. However, the California school district was not fined and did not have to admit wrongdoing.

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The U.S. State of Kansas has agreed to settle U.S. Securities and Exchange Commission fraud charges accusing it of failing to disclose in offering documents that the Kansas Public Employees Retirement System (KPERS), its pension system, was very underfunded. The regulator says that this established a repayment risk for bond investors. At issue were eight bond offerings valued collectively at $273 million.

According to the regulator’s order, the bond offers were issued via the Kansas Development Finance Authority (KDFA). Not only did the bond offering documents purportedly fail to disclose KPERS’ unfunded liability but also the paperwork did not describe what effect this could have on payments. The SEC said these poor disclosures stemmed from inadequate communications and procedures between KDFA and the state’s Department of Administration, which let the former know what data should have gone into the offering materials.

As a result, said the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit chief LeeAnn Ghazil Gaunt, Kansas gave investors were given an “incomplete” picture of the state’s finances and its potential ability to pay back the bonds (because of other stresses on its budget). The state has since put into place new procedures and policies to make sure that the appropriate disclosures about pension liabilities are disclosed in offering documents.

As part of its broader mandate under the Dodd-Frank Wall Street Reform and Consumer Protection Act, this year the Municipal Securities Rulemaking Board will concentrate on implementing a regulatory framework for municipal advisors that will encompass professional qualification standards, rules, and education. Already, the MSRB has made a priority the development of five rules for muni advisors.

The rules are intended to protect municipal entities and investors.They have to do with fiduciary duty, fair dealing standards of conduct, municipal firm supervisory requirements, pay-to-play activities, solicitor duties, and gift and gratuity limits to municipal issuer employees. The board intends to provide outreach and education to municipal advisors to assist them in getting ready for regulatory oversight and participating in rulemaking and professional qualification standards.

Just last week, the MSRB put out a draft rule to govern municipal advisor conduct. Draft Rule G-42 codifies the Dodd-Frank Act’s language that places a fiduciary responsibility on municipal advisors to put the interest of their clients above their own—and that they them owe not just a duty of care but also a duty of loyalty. If the draft rule, also called the Duties of Non-Solicitor Municipal Advisors, passes, this would prevent municipal advisors and affiliates from taking part in a transaction other than in a principal role with a client. According to BondBuyer.com, some market participants are worried that this means municipal advisors won’t be allowed to take part in non-fiduciary business relationships concurrent with the municipal advisory agreement.

According to The Wall Street Journal, hedge funds are starting to bet big on municipal debt by demanding high interest rates in exchange for financing local governments, purchasing troubled municipalities’ debt at cheap prices, and attempting to profit on the growing volatility (in the wake of so many small investors trying to get out because of the threat of defaults). These funds typically invest trillions of dollars for pension plans, rich investors, and college endowments. Now, they are investing in numerous muni bond opportunities, including Puerto Rico debt, Stanford University bond, the sewer debt from Jefferson County, Alabama, and others.

Currently, hedge funds are holding billions of dollars in troubled muni debt. The municipal bond market includes debt put out by charities, colleges, airports, and other entities. (Also, Detroit, Michigan’s current debt problems, which forced the city into bankruptcy, caused prices in the municipal bond market to go down to levels that appealed to hedge funds.)

Hedge fund managers believe their efforts will allow for more frequent trading, greater government disclosures, and transparent bond pricing and that this will only benefit municipal bond investors. That said, hedge fund investors can be problematic for municipalities because not only do they want greater interest rates than did individual investors, but also they are less hesitant to ask for financial discipline and better disclosure.

In the biggest municipal bankruptcy in this country to date, Alabama’s Jefferson County has sought Chapter 9 bankruptcy protection. The filing comes after the failure of state lawmakers to support an agreement with JPMorgan Chase & Co. (JPM) and other creditors to lower its over $3B debt tied to a sewer system. Now, Jefferson County’s creditors must contend losses in the hundreds of millions of dollars. There is also once more the worry that defaults may go up in the municipal bond market. This sewer-debt crisis has stalled economic progress in Alabama.

The accord that had been tentatively reached with creditors offered $1.1 billion in concessions and yearly sewer-raises of up to 8.2% for the first three years. Lawmakers, however, worried that these terms would take a toll on the poor, while creditors wouldn’t commit in writing to the agreement.

Jefferson County’s leading unsecured creditors are Bayerische Landesbank, a JPMorgan unit, and Depository Trust Co. In addition to sewer debt, the county owes approximately $1 billion. This includes $801M in school-construction bonds and $201M in general-obligation securities.

JPMorgan, which had over $1.2B of the county’s sewer debt as of May, didn’t want Jefferson County to file for Chapter 9. It was just two years ago that the financial firm consented to pay $722M to settle SEC charges that its bankers issued payments to people affiliated with Jefferson County politicians to garner business. Larry Langford, a former county commissioner, was even convicted of receiving bribes.

It is up now to Jefferson County to demonstrated to a federal judge that it cannot cover its bills. It must also set up a plan for how to fulfill its commitments.

Municipal bankruptcies are different from corporate ones in that creditors are not allowed to sell or seize the county’s assets. A trustee also cannot be appointed to run the county. Just recently, Harrisburg, Pennsylvania also filed for bankruptcy. The state capital noted that it had millions of dollars in late bond payments linked to a trash-to-energy incinerator. In August, Central Falls Rode Island filed for bankruptcy protection. The city has nearly $21 million in outstanding debt, not to mention unaffordable pension costs.

Although municipal bankruptcies don’t happen as often as corporate bankruptcies, Jefferson County is the eleventh one this year. Prior to this bankruptcy, the largest one was in 1994 when $1.7B in interest-rate bets losses and approximately $2.2 billion in outstanding debt promoted Orange County, California to file in 1994.

Our securities fraud attorneys are committed to fighting institutional investor fraud by helping municipalities and other clients that have sustained losses recoup their losses.

Jefferson County, Alabama, Votes to Declare Biggest Municipal Bankruptcy, Bloomberg.com, November 9, 2011

Jefferson County, Alabama to file for largest municipal bankruptcy, CNN, November 9, 2011

More Blog Posts:
Jefferson County, Alabama Votes to Settle its $3.14B Bond Debt with JPMorgan and Other Creditors, Institutional Investor Securities Blog, September 7, 2011

UBS Financial Reaches $160M Settlement with the SEC and Justice Department Over Securities Fraud, Antitrust, and Other Charges Related to Municipal Bond Market, Institutional Investor Securities Blog, May 16, 2011

JPMorgan Chase to Pay $211M to Settle Charges It Rigged Municipal Bond Transaction Bidding Competitions, Stockbroker Fraud Blog, July 9, 2011

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Avoiding what would have been the largest municipal bankruptcy in our nation’s history, Jefferson County, Alabama has agreed to a settlement with creditors over the $3.14B in bond debt that it owes. This debt comes from the county borrowing too much to overhaul its local sewers.

Jefferson County went into financial crisis in 2008 after Wall Street’s own credit crisis cost the bond loss that should have been paid for with revenue from the county’s sewer system. The combination of debt and aggressive use of derivatives buoyed by the collapse of bond insurers also didn’t help.

The vote to settle was approved by 4 out of 5 county commissioners. Per the settlement, $1.1 billion of debt will be forgiven by creditors. JPMorgan, which arranged the debt deals and is the largest creditor, will taken on the majority of losses.

To make the agreement work, local sewer rates will go up 8.2% during the first three years and after that at no more than 3.25%. The State of Alabama will have to set up new legislation that would establish an entity to run the sewer system and sell bonds. About $2 billion of the debt that remains will have to refinance and the new bonds will have to be sold.

It was in December 1996 that Jefferson County said it would fix and reconstruct its sewer system to settle a complaint contending that federal Clean Water Act was being violated because untreated waste was getting into rivers. The following year, the county sold bonds to pay for the project, making $55 million in offerings that was led by underwriter Raymond James & Associates.

While the sewer system was expected to cost about $1.5 billion, the cost actually ended up being $2.2 billion, which resulted in the sewer system having debt of over $3 billion. Over the next decade, sewer rates went up significantly.

In 2008, the collapse of the housing market caused the credit ratings of XL Capital Assurance Inc. and Financial Guaranty Insurance Co. to be cut because of losses sustained on securities linked to home loans. Buyers weren’t able to hold the bonds and investors started getting rid of them in mass quantities. Banks also stopped buying auction-rate securities to build up their own cash reserves. When many auction failed, Jefferson County was left with numerous interest rates.

In August 2008, JPMorgan reached agreements with state regulators that it would buyback ARS sold to investors. JPMorgan had been the broker for $1.8 billion of Jefferson County’s ARS bonds. The following month, the Jefferson County’s trustee said the county was in default under agreements involving $3.2 billion of sewer bonds because it didn’t make $46 million in sewer payments. The county’s financial state wasn’t helped by the number of corruption-related charges over the last few years resulting in guilty pleas and convictions related to financing and sewer construction.


Related Web Resources:

Jefferson County’s Path From Scandal to Settlement: Timeline, Bloomberg Businessweek, September 16, 2011

Ala. county votes to settle debt, avoid bankruptcy, Associated Press, AP/Google, September 16, 2011

Jefferson County, Alabama


More Blog Posts:

Jefferson County, Alabama Officials Want JP Morgan Chase & Other Wall Street Creditors to Accept Proposal that Would Eliminate Almost Half of Its $3.2 Billion Sewer Debt, Institutional Investor Securities Blog, September 28, 2011

Muni Debt Reform: SEC to Proceed with Field Hearing in Alabama, Stockbroker Fraud Blog, May 29, 2011

JPMorgan Chase to Pay $211M to Settle Charges It Rigged Municipal Bond Transaction Bidding Competitions, Stockbroker Fraud Blog, July 9, 2011

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UBS Financial Services Inc. has consented to a $160 million settlement over charges that it took part in anticompetitive practices in the municipal bond market. The Securities and Exchange Commission and the US Justice Department announced the settlement together. 25 state attorneys generals and 3 federal agencies had accused the financial firm of rigging a minimum of 100 reinvestment transactions in 36 states, which placed the tax-exempt status of over $16.5 billion in municipal bonds at peril. Justice officials say that the unlawful conduct at issue, which involved former UBS officials, took place between June 2001 and June 2006.

According to SEC municipal securities and public pensions enforcement unit chief Elaine Greenberg, ex-UBS officials engaged in “secret arrangements,” played various roles, and took part in “illegal courtesy bids, last looks for favored bidders, and money to bidding engagements” in the guise of “swap payments” to “defraud municipalities” and “win business.” The SEC contends that between October 2000 until at least November 2004, the financial firm rigged a minimum of 12 transactions while serving as bidding agents for contract providers, won at least 22 muni reinvestment instruments, entered at least 64 “courtesy” bids for contracts, and paid undisclosed kickbacks to bidding agents at least seven times. The SEC says that UBS indirectly deceived municipalities and their agents with their fraudulent misrepresentations and omissions and rigged bids to make them appear as if they were competitive when they actually weren’t.

UBS, which left the municipal bond market in 2008, says that the “underlying transactions” involved were in a business that is no longer a part of the financial firm and that the employees who were involved don’t work there anymore. Of the $160 million settlement, $47.2 million will go to the SEC, which in turn will give the money to the 100 muni issuers as restitution, about $91 million will go to the states, and $22.3 million will go to the IRS.


Related Web Resources:

UBS Financial Reaches $160M Settlement with the SEC and Justice Department Over Securities Fraud, Antitrust, and Other Charges Related to Municipal Bond Market, The Bond Buyer, May 5, 2011

UBS to Pay $160 M to Resolve Charges Over Muni Bond Market Probe, BNA Securities Law Daily, May 5, 2011

United States Justice Department

Internal Revenue Service

Securities and Exchange Commission


More Blog Posts:

UBS Financial Services Fined $2.5M and Ordered to Pay $8.25M Over Lehman Brothers-Issued 100% Principal-Protection Notes, Institutional Investors Securities Blog, April 12, 2011

Securities Fraud Lawsuit Against UBS Securities LLC by Detroit Pension Funds Won’t Be Remanded to State Court, Says District Court, Institutional Investors Securities Blog, January 17, 2011

UBS to Pay $2.2M to CNA Financial Head for Lehman Brothers Structured Product Losses, Stockbroker Fraud Blog, January 4, 2011

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According to JPMorgan Chase & Co. (NYSE: JPM) Chief Executive Officer Jamie Dimon, investors of the municipal bond market can expect expect more bankruptcies. He spoke at the investment bank’s annual healthcare conference and called for those investing in the $2.9 trillion public dept market to be cautious. Dimon is not alone in his prediction. Cities, such as Harrisburg, Pennsylvania and Detroit, Michigan, have also talked about possibly filing for bankruptcy.

Dimon’s statements come even as the number of bankruptcy filings has gone down. Bloomberg.com reports that while 10 municipal entities sought bankruptcy protection in 2009, just five bankruptcy filings were made last year. The largest last year was a South Carolina toll road that had over $300 million in debt. Also, in 2008, Vallejo California sought bankruptcy protection after it didn’t win union pay cuts.

Now, Liberty Mutual Holding Co. has reduced its municipal debt holdings in California, Connecticut, and Illinois. At the end of 2009, it had about $15.5 billion in municipal securities. As of last September, it had about $13.7 billion in municipal securities, or about 20% in invested assets. Moody’s Investors Service has given Liberty Mutual’s holdings in Illinois an A1 rating. Its holdings in Connecticut have been rated Aa2. Insurer Allstate also has had to reduce its municipal securities holdings.

The plaintiffs in a class action case against Bank of America Corp. (BAC) are asking a court to intervene in the securities settlement reached between the investment bank and 20 state attorneys generals over the alleged manipulation of municipal derivatives bids. As part of the global settlement, BofA agreed to pay approximately $137 million: $9.2 million to the Office of the Comptroller of Currency, $36.1 million to the Securities and Exchange Commission, $25 million in restitution to the Internal Revenue Service, and $66.9 million to the states. The plaintiffs claim that the settlement purports to settle the charges of their case without consulting with or notifying the class counsel.

Fairfax County, Va., the state of Mississippi, and other plaintiffs filed the securities class action against 37 banks. They claimed that the alleged bidding manipulation practices involving municipal derivatives had been occurring as far back as 1992.

Now, the plaintiffs want permission to file a motion to request an enjoinment of the BoA global settlement. Meantime, BoA is arguing that the plaintiffs’ motion is “baseless” and they want the court to not allow it. The investment bank says that it disagrees that the states’ settlement resolves the class claims. BoA also contends that it kept Judge Weinstein and the interim class counsel abreast of settlement negotiations with the state.

Related Web Resources:
Bank of America, Class Plaintiffs Tussle Over Bank’s Global Settlement With States, BNA Securities Law Daily, December 21, 2010

Bank of America to Pay $137M Over Alleged Investment Scam To Pay Municipalities Low Interest Rates on Investments and $9M Over Alleged Bid-Rigging Scheme to Nonprofits, Institutional Investors Securities Blog, December 16 2010

Texas, 19 States Resolve Antitrust Investigation Into Bank of America’s Municipal Derivatives Marketing, Cherokeean Herald, December 8, 2010

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Bank of America has agreed to pay $137 million to settle charges that it was involved in a financial scheme that allowed it to pay cities, states, and school districts low interest rates on their investments. The financial firm allegedly conspired with rivals to share municipalities’ investment business without having to pay market rates. As a result, government bodies in “virtually every state, district, and territory” in this country were paid artificially suppressed yields or rates on municipal bond offerings’ invested proceeds.

Bank of America has agreed to pay $36 million to the Securities and Exchange Commission and $101 million to federal and state agencies. The Los Angeles Times is reporting that $67 million will go to 20 US states. BofA will also make payments to the Office of the Comptroller of the Currency and the Internal Revenue Service. The SEC contends that from 1998 to 2002 the investment bank broke the law in 88 separate deals.

In its Formal Agreement with the Office of the Comptroller of the Currency, Bank of America agreed to strengthen its procedures, policies, and internal controls over competitive bidding in the department where the alleged illegal conduct took place, as well as take action to make sure that sufficient procedures, policies, and controls exist related to competitive bidding on an enterprise wide basis. The OCC is accusing the investment bank of taking part in a bid-ridding scheme involving the sale and marketing of financial products to non-profit organizations, including municipalities.

Per their Formal Agreement, the bank must pay profits and prejudgment interest from 38 collateralized certificate of deposit transactions to the non-profits that suffered financial harm in the scam. Total payment is $9,217,218.

Related Web Resources:
Bank of America settles allegations of kickbacks, collusion, Los Angeles Times, December 8, 2010

Bank of America to Pay $137 Million in Muni Cases, Bloomberg, December 7, 2010

OCC, Bank of America Enter Agreement Requiring Payment of Profits Plus Interest to Municipalities Harmed by Bid-Rigging on Financial Products, Office of the Comptroller of the Currency, December 7, 2010

Bank of America, Stockbroker Fraud Blog

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