Charlie Gasparino of Fox Business News seems to have scooped a muniland story yesterday when he reported that JPMorgan had failed to include material facts in a municipal bond offering on which it was the lead underwriter.
Lead underwriters have a special role in muniland. The Tower Amendment, passed in 1975, prohibited the federal government from requiring issuers of municipal debt to make specific disclosures to investors prior to offering securities for sale. Underwriters, however, do not enjoy the same protection, so the law has evolved to make them liable for the contents of the offering document for municipal debt. This requirement is administrated by the Municipal Rulemaking Board through Rule G-17, or the fair-dealing rule.
MSRB’s Rule G-17 is the Ten Commandments of muniland (emphasis mine):
Rule G-17 precludes a dealer, in the conduct of its municipal securities activities, from engaging in any deceptive, dishonest, or unfair practice with any person, including an issuer of municipal securities. The rule contains an anti-fraud prohibition. Thus, an underwriter must not misrepresent or omit the facts, risks, potential benefits, or other material information about municipal securities activities undertaken with a municipal issuer.
Gasparino’s reporting, which seems to be based on sources inside JPMorgan, nails the G-17 violation. He cites the omission of risks related to the Massachusetts state pension in a $469 million general obligation bond offering in May 2011. As the lead underwriter on the deal, JPMorgan carried out an internal study on pension risks but did not disclose those risks within the Massachusetts bond offering document:
Yet, J.P. Morgan didn’t include its pension fund analysis in bond deal disclosure materials that are made to investors, known as the deal’s “official statement,” according to current and former executives at the firm. Case in point: a $469 million bond issue by Massachusetts in May of last year, two months after the pension report was published.