Some investors are seeking to profit from the financial strains of states and municipalities, warned Elaine C. Greenberg, chief of the SEC enforcement division’s new municipal securities and public pensions unit.
“There are people who may want to benefit from the financial stress that is out there,” she said Monday at the Council of Institutional Investors conference in Washington. There are “financial products that would take advantage of that.”
Ms. Greenberg, in a panel discussion in which she discussed her new unit’s range of responsibilities, said it’s now possible to buy credit default swaps (a type of hedging contract to protect against an investment loss) to short the state of California, which is betting that the state will fail to meet its debt obligations.
There is a question “whether that raises other policy concerns, but that product does exist,” she said.
Ms. Greenberg said the new unit will investigate cases in which public pension funds find themselves victims of investment fraud or cases of public pension funds engaging in actions that violate federal securities laws.
The unit “will focus on various types of misconduct in the municipal securities market in connection with public pension funds, including offering and disclosure fraud, tax or arbitrage fraud, pay-to-play and public corruption violations, valuation and pricing fraud (and) public pension accounting disclosure violations,” she said.
“Public pension funds are among the largest and most active institutional investors … and like any other investor they can fall victim to any number of frauds,” she said.
The unit also will investigate the failure of pension fund investment consultants to disclose conflicts of interest to their clients.