November 25, 2015

SEC Probes Into Municipal Securities Violations Expected to Lead to Enforcement Actions

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.

Continue reading "SEC Probes Into Municipal Securities Violations Expected to Lead to Enforcement Actions" »

August 11, 2014

Kansas Settles SEC Charges Over Allegations it Misled Investors about Risks in Muni Bond Offerings Totaling $273 Million

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.

Kansas settled the SEC charges without denying or admitting to the findings. The state also agreed to cease and desist from future violations of certain sections of the Securities Act of 1933. No fine was involved.

The SEC has been assessing muni bond disclosures nationwide. Previously, it sanctioned New Jersey for not disclosing to investors that two of its biggest pension plans were underfunded. Last year, the regulator charged Illinois for misleading pension disclosures.

Our municipal bond fraud lawyers represent institutional clients and high net worth individual investors. Contact The SSEK Partners Group today.

SEC Charges Kansas for Understating Municipal Bond Exposure to Unfunded Pension Liability,, August 11, 2014

Read the SEC Order (PDF)

More Blog Posts:
Judge Rakoff Approves Citigroup’s $285M Mortgage Securities Fraud Deal with the SEC, Institutional Investor Securities Blog, August 5, 2014

SEC Wants Texas’ Wyly Brothers to Pay $750M For Securities Fraud, Stockbroker Fraud Blog, August 7, 2014

FBI Probes Possible High-Speed Trading, Insider Trading Link, Institutional Investor Securities Blog, April 1, 2014

January 15, 2014

MSRB to Implement Municipal Advisory Regulatory Framework in 2014

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, 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.

Securities Industry and Financial Markets Association co-head Leslie Norwood is quoted as saying that she believes the draft rule would push bank-affiliated municipal advisors out because that their banking arms might manage accounts for a municipal entity could prevent them from being the MA of that entity. Norwood believes this “limits issuer choice” and there is no need for this.

The draft rule also includes what is the equivalent of a suitability rule, mandating that advisors have reasonable grounds for determining when their recommendations to clients are suitable. This would entail that they use “reasonable due diligence” to find out essential information about clients. Also, fee-splitting deals between underwriters and municipal advisors wouldn’t be allowed—although advisors and other service providers of clients can still do this if it is disclosed from the start.

Meantime, the Securities and Exchange Commission’s municipal advisor registration rule just went into effect this past Monday.

The MSRB also just release its 2013 Annual Report, which includes updates on its initiatives to enhance municipal advisor financial disclosure practices, streamline its rulebook, and improve its Electronic Municipal Market Access (EMMA) website.

The SSEK Partners Group has represented thousands of investors in recouping their securities fraud losses. We represent clients in arbitration and litigation and we work with investors in the US, Puerto Rico, as well as those abroad with securities claims and lawsuits against a US-based firm. Contact our municipal advisor fraud lawyers today.

MSRB's First Draft Municipal Advisor Rule Alarms Dealers,, January 9, 2014

2013 Annual Report, MSRB (PDF)

Electronic Municipal Market Access, MSRB

More Blog Posts:
Securities Fraud Court Matters, Institutional Investor Securities Blog, January 14, 2014

SROs at Work: MSRB Prioritizes Fiduciary Duty When Setting Up New Muni Advisor Regime & FINRA Puts Out Closed-End Funds Alert to Investors, Stockbroker Fraud Blog, November 13, 2013

Puerto Rican Labor Groups Want the US Territory to Sue UBS over the Bond Debacle, Institutional Investor Securities Blog, October 28, 2013

November 15, 2013

Hedge Funds Are Moving in on Municipal Debt, Including Puerto Rico Debt

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.

Now, hedge funds are reportedly suggesting short-term financing for Puerto Rico, which is in huge economic trouble with its $70 billion debt. These funds began buying up Puerto Rico bonds after their prices dropped a few months ago. Some of the bets are already paying off while other hedge funds are preparing for even bigger bets.

However, Puerto Rico’s debt crisis has become a huge problem for many investors, some of whom already have lost their life savings. At The SSEK Partners Group, our Puerto Rico bond lawyers have been meeting with investors that purchased muni bonds from brokerage firms, including Banco Popular, Banco Santander (SAN.MC), and UBS (UBS). Our securities attorneys are available to meet with you in Puerto Rico and the US. Hablamos Español.

Unfortunately, some brokers that sold Puerto Rico muni bonds reportedly suggested that investors borrow money to buy them, while other representatives told investors to buy the bonds and then borrow against their value. Already, UBS Puerto Rico has consented to pay $26M to settle SEC charges and pay fines and disgorgement over allegations that it sold mispriced closed end funds to customers. Unfortunately, investors will not get anything back from this, which is why you should contact our muni bond fraud lawyers.

Your initial case assessment with The SSEK Partners Group is free.

Individual investors flee US municipal bond market, Reuters, November 12, 2013

Hedge Funds Are Muscling Into Munis, The Wall Street Journal, November 11, 2013

Is Puerto Rico the next Detroit?, CNN, October 31, 2013

Individual investors flee US municipal bond market, Reuters, November 12, 2013

More Blog Posts:
SROs at Work: MSRB Prioritizes Fiduciary Duty When Setting Up New Muni Advisor Regime & FINRA Puts Out Closed-End Funds Alert to Investors, Stockbroker Fraud Blog, November 13, 2013

Advice to Advisors: Financial Advisors Taught Ways to Avoid SEC Scrutiny, Stockbroker Fraud Blog, November 11, 2013

SEC Members Discuss Agency’s Core Mission, New Penalty Policy, and Private Offerings in the Wake of General Solicitation, Institutional Investor Securities Blog, November 12, 2013

November 15, 2011

Jefferson County, Alabama Declares Municipal Bankruptcy

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,, 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

Continue reading "Jefferson County, Alabama Declares Municipal Bankruptcy" »

September 7, 2011

Jefferson County, Alabama Votes to Settle its $3.14B Bond Debt with JPMorgan and Other Creditors

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

Continue reading "Jefferson County, Alabama Votes to Settle its $3.14B Bond Debt with JPMorgan and Other Creditors " »

May 16, 2011

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

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

Continue reading "UBS Financial Reaches $160M Settlement with the SEC and Justice Department Over Securities Fraud, Antitrust, and Other Charges Related to Municipal Bond Market" »

January 18, 2011

JPMorgan Chase & Co. CEO Warns Municipal Bond Investors to Expect More Bankruptcies

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. 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.

With cities and states hitting their record debt levels, investors in municipal bonds are concerned that their investments are no longer guaranteed to be safe. Attention institutional investors: Contact our securities fraud law firm to discuss your case.

Related Web Resources:
JPMorgan Chase & Co. (NYSE: JPM) CEO Jamie Dimon Issues Warning for Municipal Bond Investors, Money Morning, January 17, 2011

JPMorgan's CEO Dimon Says More U.S. Municipalities May File for Bankruptcy, Bloomberg, January 11, 2011

Municipal Securities, Institutional Investors Securities Blog

Securities Fraud Attorneys

December 31, 2010

Class Action Plaintiffs Dispute Bank of America’s $137M Settlement with State Attorney Generals Over Municipal Derivatives

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

Continue reading "Class Action Plaintiffs Dispute Bank of America’s $137M Settlement with State Attorney Generals Over Municipal Derivatives" »

December 16, 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

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

Continue reading "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 " »

November 17, 2010

Failure of Municipal Swaps Cost Taxpayers $4 Billion

According to, taxpayers have had to pay over $4 billion because of insurance companies and banks’ failed promise to nonprofits and governments that financial engineering would bring down interests on bonds sold for public projects. Since 2008, hundreds of borrowers throughout the US have had to pay Wall Street to end their agreements. Citigroup, JP Morgan Chase & Company, Morgan Stanley , and Bank of America are a few of the other firms that have received payments from borrowers.

For example, California’s water resources department paid $305 million to Morgan Stanley-led banks to unwind interest-rate bets that backfired, while the Bay Area Toll Authority gave bond insurer Ambac Financial Group Inc. $105 million to terminate $1.1 in billion interest-rate agreements. In August, The state of North Carolina shelled out $59.8 million.

Interest-Rate Swap
In this type of transaction, two parties exchange payment based on a principal amount that has been agreed upon. Most municipal market swaps require borrowers to put out long-term securities with interest rates that change every month or week. The borrowers are to exchange payments, resulting in a fixed-rate paid to an insurer or bank, while a variable rate in return is received.

The swaps drew a lot of interest because nonprofits and governments could pay lower rate than if they had sold conventional fixed-rate securities. According to the Financial Crisis Inquiry Commission senior researcher Randall Dodd, prior to the credit crisis, there were up to $500 billion of the deals done were in the $2.7 trillion municipal bond market.

Unfortunately, the credit market did collapse and Wall Street’s payments dropped and could no longer cover the municipalities’ debt costs. Still, under the agreements, borrowers had to keep selling adjustable-rate securities.

Bloomberg reports that there aren’t many taxpayers that are familiar with how much it cost to untangle municipal swaps. (Payment disclosures to Wall Street are usually noted somewhere in the documents given to investors by borrowers when the bonds are sold.) In many instances, investment firms that receive payments aren’t clearly identified and government officials usually don’t draw notice to payments made to terminate contracts.

Related Web Resources:
Wall Street Takes $4 Billion From Taxpayers as Swaps Roil Public Financing, Bloomberg, November 10, 2010

Making Use of Muni Swaps (PDF)

Municipal Securities, Stockbroker Fraud Blog

Continue reading "Failure of Municipal Swaps Cost Taxpayers $4 Billion" »

October 9, 2010

Municipal Securities Investors Need More Information About Bond Purchases, Says SEC

According to US Securities and Exchange Commissioner Elisse Walter, municipal securities market investors with securities fraud cases are entitled to clear information about the bonds they are purchasing. Walters spoke at an SEC-sponsored hearing last month. Other panelists also echoed the need for accuracy, transparency, and timeliness of disclosure for bond buyers so that they are given the proper information at the right time.

Walter said that about 51,000 local and state entities issue bonds for maintaining and constructing infrastructure projects. She also noted that even though retail investors hold 36% of outstanding municipal securities directly and another 34% own them indirectly through close-end funds, mutual funds, and retail-sized trade accounts for up to 81% of trading, volume, the municipal securities market is missing a number of the protections that exist in other sectors of the US capital markets. Walter said that municipal securities investors have the right to these same protections, as well as the right to information that doesn’t have material omissions or is materially misleading. She classified the treatment of municipal securities investors as “second class.”

Walter said that even though municipal securities are reputedly safe, they can and have been known to default. Between 1999 and 2009, out of $3.4 trillion dollars issued, issuers defaulted on more than $24 billion in municipal bonds. Last year alone, 194 municipal bonds that had an overall dollar amount of nearly $7 billion in bonds defaulted.

The hearing is the first of several that gives participants the forum to examine the $2.8 trillion municipal securities markets. Topics include financial reporting and accounting, investor protection and education, market liquidity and stability, municipalities as conduit borrowers, the Municipal Securities Rulemaking Board, professionals and market intermediaries, offering participants, 529 plans, and Build America Bonds. The commission is going to issue a staff report that will include recommendations for industry “best practices,” regulatory changes, and legislative changes.

Related Web Resources:
SEC's Walter takes aim at 'second-class treatment' of muni investors, Investment News, September 21, 2010

Speech by SEC Commissioner: Statement at SEC Field Hearing on the State of the Municipal Securities Market, SEC, September 21, 2010

Continue reading "Municipal Securities Investors Need More Information About Bond Purchases, Says SEC" »

September 30, 2010

NJ Settles Municipal Bond Offering Fraud Charges with SEC

The state of New Jersey has settled Securities and Exchange Commission charges involving the alleged fraudulent marketing of municipal bonds. This is the first time that the SEC has filed charges against a US state for allegedly violating federal securities law.

The charges, brought by the SEC’s Municipal Securities and Public Pensions Unit, involved $26 billion in approximately 79 bond offerings that were offered between August 2001 and April 2007. The SEC accused New Jersey of concealing from bond investors the fact that the state didn’t have the money to fulfill its obligations under two of its largest pension plans for state employees and teachers. New Jersey also allegedly using accounting tricks to avoid increasing taxes to fund a 2001 benefits increase for both plans and hid this information from investors. As a result, the SEC contends that losses totaling approximately $2.4 billion were covered up.

The SEC says that New Jersey did not have written procedures on how to review bond documents and failed to train employees about its disclosure obligations. A training program regarding disclosures is now in place.

By agreeing to settle, New Jersey is not admitting to or denying the charges. It has, however, agreed to cease and desist from future violations. The SEC did not order a monetary fine or penalty as part of the settlement.

Related Web Resources:
State of New Jersey Resolves Three Year Inquiry by The U.S. Securities and Exchange Commission in Connection With Bond Offerings Between 2001 and 2007, New, August 18, 2010

SEC Charges State of New Jersey for Fraudulent Municipal Bond Offerings,, AUgust 18, 2010

NJ Settles SEC Charges Of Fraudulent Municipal Bond Offerings, The Wall Street Journal, August 18, 2010

Continue reading "NJ Settles Municipal Bond Offering Fraud Charges with SEC" »

September 8, 2010

Municipal Securities Rulemaking Board Can Expand Public Information on Municipal Variable Rate Demand Obligations and Auction Rate Securities, Says SEC

The US Securities and Exchange Commission has approved the Municipal Securities Rulemaking Board’s proposal to expand publicly available information about auction rate securities and municipal variable rate demand obligations. The SEC also approved letting the MSRB require that municipal securities dealers provide more information about these securities while allowing them to make this data available through its Electronic Municipal Market Access website. The disclosures will hopefully enhance transparency for investors that want to assess key information regarding the degree of dealer support, auction liquidity, and variable rate securities resales.

Once the approval is implemented, which could take nine months, the MSRB will gather liquidity facility documents for variable rate demand obligations from municipal securities dealers. Documents may include stand-by purchase agreements, letters of credit, and identifying information related to the provider of the liquidity facility that was available at the time of the interest rate. Dealers will have to report ARS bidding data and documents defining auction procedures and interest rate setting mechanisms to the MSRB. All documents and information from the dealers will be made accessible through the EMMA Web site. EMMA currently offers free public access to interest rate information for ARS and VRDOs.

MSRB regulates banks and securities firms that trade, underwrite, and sell municipal securities. It also gathers and gives out market information and is committed to ensuring the key municipal market data is available and free to the public. This data allows retail investors to evaluate the risks and benefits. MSRB is a self-regulatory organization subject to Securities and Exchange Commission oversight.

Related Web Resources:
MSRB Receives SEC Approval to Create Additional Transparency for Variable Rate Securities, MSRB, August 26, 2010

Municipal Market Rulemaking Board Asks SEC To Approve Expansion, Wall Street Journal, August 27, 2010

Municipal Securities Rulemaking Board

Electronic Municipal Market Access

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