Securities Litigation

The SEC continues to ramp up its Enforcement efforts in the municipal-securities realm. The agency announced a series of settled actions on November 6. First "Control Person" Charge Against Issuer Officials The Commission announced a settled administrative proceeding against municipal issuer Allen Park, Michigan and settlements in federal-court actions against the City's former Mayor and City Administrator. The SEC charged that offering documents for two bond issues knowingly painted too rosy a picture for a $146 million film-studio project, which had been all but abandoned in the face of an undisclosed budget deficit by the time the bonds issued. The Commission sued the ex-mayor and ex-administrator in federal court, asserting "control person" liability for directing and approving the City's bond issues with knowledge the offerings' disclosures were outdated and overly-optimistic. Both men were barred from participating in further municipal-securities offerings and one paid a $10,000 fine. See SEC v. Burtka, No. 2:14-cv-14278 (USDC EDMI Nov. 6, 2014); SEC v. Waidelich, No. 2:14-c-14279 (USDC EDMI Nov. 6, 2014). The suits are the Commission's first use of "control person" liability against elected issuer officials. "When a municipal official … controls the activities of others who engage in fraud, we won't hesitate to use every legal avenue available to us in order to hold those officials accountable," said the Chief of Enforcement's Municipal Securities and Public Pensions Unit. Due to the 11^th Amendment and the Tower Amendment to the MSRB's enabling legislation, the SEC cannot regulate municipal issuers directly. But it can, and does, prosecute them for false statements in municipal-securities offerings. Using the expanded reach of its administrative forum authorized by Dodd-Frank reforms, the SEC typically charges issuers with negligent violations of anti-fraud rules in settled administrative proceedings including "go-forth-and-sin-no-more" cease and desist provisions, without monetary penalties. See In the Matter of City of Allen Park, Michigan, Rel. Nos. 33-9677; 34-73539 (Nov. 6, 2014). The prosecution comes as municipal issuers face a December 1 deadline to self-report any material failures to make continuing-disclosures required in connection with prior bond issues, under similar settlement terms offered in the Municipal Continuing Disclosure Cooperation Program. I described the initiative in an October 20 blog post, here. The SEC's Allen-Park News Release, No. 2014-249, is here. "Broken Windows" for Munis, Too. On November 3, the Commission announced a raft of enforcement actions against 13 municipal securities dealers for selling Puerto Rico junk bonds to investors in amount lower than the $100,000 minimum denomination set for the issue. The action was another agency first -- this time, the first Enforcement action charging violations of MSRB Rule G-15(f). The Rule has been on the books for years, and self-regulatory organization NASD (now, FINRA) first fined dealers for minimum-denomination violations in 2006. SEC Enforcement Director Ceresny pointed to the Commission's new municipal emphasis, saying "These actions demonstrate our commitment to rigorous enforcement of all types of violations in the municipal bond market." The 13 firms settled without admitting or denying the charges, agreeing to a censure, compliance-policy reviews and fines varying from $54,000 - $130,000. The actions amount to strict-liability offenses and are another manifestation of Chair White's "broken windows" policy seeking to spur greater industry-wide compliance by prosecuting every offense identified. These actions follow other recent mass-prosecutions in connection with, e.g., 8K filings, Form-4 reports, and Rule 105 short sales. News Release No. 2014-248 (Nov. 5, 2014)(10 companies re 8K filings); News Release No. 2014-195 (Sept. 16, 2014)(19 firms and traders re Rule 105 short-sale violations); News Release No. 2014-190 (Sept. 10, 2014)(28 officers, directors, shareholders re Form 4 insider-sales reporting). The SEC's News Release, No. 2014-246, is here. Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Managing Partner of the Nashville office, Tom is licensed in Tennessee, Texas and Louisiana. He has over 28 years' experience representing financial institutions in litigation, regulatory and compliance matters. © 2014 by Thomas K. Potter, III (all rights reserved)