SEC Brings First Post MCDC Enforcement Action Against Public Issuer and Investment Banker
Public officials, including City Managers, Finance Directors and other staff, have reason to be concerned about whether their City, Town, Special District, or School District is meeting continuing disclosure requirements.
On August 23, the Securities and Exchange Commission announced that the Beaumont Financing Authority of Beaumont, California agreed to settle charges brought in a United States District Court that the Authority made false statements of material fact about its continuing disclosure compliance efforts in past bond deals. See SEC Press Release 2017-148. The investment banking firm of O’Connor & Company Securities Inc. also settled charges that it failed to conduct reasonable due diligence related to the Authority’s continuing disclosure lack of compliance prior to underwriting their bond deals.
Investment banks have a duty to form a reasonable belief that the issuer will make appropriate and required continuing disclosure to the market prior to underwriting any bonds for that issuer. Failure to conduct due diligence sufficient to form such a reasonable belief is a securities law violation.
LeeAnn Gaunt, Chief of the SEC Enforcement Division Public Finance Abuse Unit, stated that “Investors in municipal bonds depend on timely and complete continuing disclosure from municipal issuers… Issuers and underwriters will continue to be held accountable when they fail to provide investors with an accurate picture of past compliance with continuing disclosure obligations.” The SEC has made it quite clear in a number of recent policy statements that it takes continuing disclosure very seriously.
In addition to charging the City, the SEC also charged the Beaumont City Manager with violations. This is reflective of an increase of similar charges filed by the SEC against other public entities. The SEC has signaled a willingness to prosecute not only the entity but also individual employees or officers of the public entity, based on the theory of control person liability.
The Authority agreed to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act. Furthermore, the Authority agreed to hire an outside consultant, adopt continuing disclosure policies, and comply with a list of remedial items set forth by the SEC in its order.
This significant action by the SEC shows that the agency is following up on bond issuers and underwriters who fail to self-report violations under the MCDC program and that the SEC may seek to impose personal liability on employees of cities, towns, counties, and other municipal issuers.
In the event your issuer or firm receives notice of such an alleged failure, it is important to retain competent counsel immediately in order to respond the SEC charges. In addition, you should check with counsel to make sure your continuing disclosure meets SEC requirements.