Mark Funkhouser, the director of the Governing Institute and a former mayor and auditor of Kansas City, took a few swings at the SEC for its securities fraud prosecution of Harrisburg, Pennsylvania. Funkhouser has three concerns with the SEC’s case.
First, he correctly points out, as the SEC case contends, that the city of Harrisburg did not issue any financial statements between January 2009 and March 2011. The SEC says that because of this, investors had to seek out other statements made by public officials that included material misstatements. Funkhouser blames it on investors for poor diligence. He says:
You’d think it would be obvious to potential investors that if there’s not much current information available about a city’s finances they might want to think twice about buying its securities. But investors don’t always exercise proper diligence, and it wouldn’t have hurt for the SEC to have driven home that point.
This is not the way our municipal or corporate securities systems work. The system is structured so that the onus is on securities issuers to provide timely, accurate and truthful disclosure to investors so that they can do their due diligence. Pepper Hamilton, who represented Harrisburg in the SEC’s prosecution, wrote:
The case is unusual in that it is the first case in which the SEC charged a municipality with securities fraud under Section 10(b) of the Securities Exchange Act of 1934 relating to municipal securities trading on the secondary market and outside the context of a securities offering. As a condition of settlement, the City accepted—without admitting or denying—the SEC’s conclusion that the City had misstated its finances and had failed to disclose adverse financial information during 2007-2010, when Harrisburg’s financial position was deteriorating quickly.