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The State of New Jersey settled claims that it fraudulently misled municipal-bond investors while underfunding the state's two biggest pension plans in the first SEC case to target a state.
Documents for more than $26 billion in bond offerings from 2001 to 2007 “created the false impression” that the $36 billion Teachers' Pension and Annuity Fund and the $10.6 billion Public Employees' Retirement System, both of Trenton, were adequately funded, masking the fact that the state couldn't make contributions without raising taxes or cutting services, the SEC said in a statement Wednesday.
It's the first time the SEC has sued a state for violating federal securities laws and marks an early salvo in the agency's plan to crack down on fraudulent practices in the $2.8 trillion municipal bond market. U.S. state pension systems were underfunded by at least $500 billion in 2008, according to the Pew Center on the States.
“Issuers of municipal bonds must be held accountable when they seek to borrow the public's money using offering documents containing false and misleading information,” Elaine Greenberg, head of the SEC's municipal securities and public pension fund unit, said in the statement. “New Jersey hid its financial challenges from the very people who are most concerned about the state's financial health when investing in its future.”
New Jersey agreed to settle the case without admitting or denying the SEC's findings. The state consented to a cease-and-desist order, and wasn't required to pay any civil fines or penalties.
“All issuers of municipal securities, including states, are obligated to provide investors with the information necessary to evaluate material risks,” SEC Enforcement Director Robert Khuzami said in the statement. “The State of New Jersey didn't give its municipal investors a fair shake, withholding and misrepresenting pertinent information about its financial situation.”
In response to the SEC inquiry, the state hired disclosure counsel to evaluate its bond documents, stepped up disclosure training and has changed the way its pension payments are reflected in its bond documents to eliminate the issues cited by the SEC, the state's settlement with the SEC says.
“New Jersey has never failed to make a bond payment,” Andrew Pratt, a spokesman for State Treasurer Andrew Sidamon-Eristoff said in a telephone interview Wednesday. “We aim to have the best possible disclosure.“
