The near-bankrupt city of Harrisburg, Pennsylvania was charged this week by the Securities and Exchange Commission with securities fraud. Here is the official language (emphasis mine):
The Securities and Exchange Commission today charged the City of Harrisburg, Pa., with securities fraud for its misleading public statements when its financial condition was deteriorating and financial information available to municipal bond investors was either incomplete or outdated.
An SEC investigation found that the misleading statements were made in the city’s budget report, annual and mid-year financial statements, and a State of the City address. This marks the first time that the SEC has charged a municipality for misleading statements made outside of its securities disclosure documents. Harrisburg has agreed to settle the charges.
The charge adds weight to my concern about the veracity of the statements made by public officials in stressed fiscal situations. These officials have had essentially no responsibility to make accurate statements concerning financial issues. For bond investors there are often no current financials on file for the issuer. Hopefully this SEC order sets a higher bar for disclosure.
Often I think public officials have little understanding of complex financial issues, and sometimes they are just misrepresenting the truth for political purposes. Occasionally there may also be illegal activities (see Jefferson County, Alabama). In Harrisburg I think we may have seen all three: A lack of understanding, political games and illegal activities. The SEC crackdown is a good start to clean up the first two parts of the problem. Here is what I wrote about Harrisburg’s lack of disclosure in 2011: