Riley: Misleading Municipal Investors in Providence
Tuesday, September 12, 2017
Misleading the public about the finances of a municipality should be criminally prosecuted. That’s not just my opinion, it is also the opinion of some SEC commissioners and longtime officials.
Take a recent Bond Buyer Magazine interview with Peter Chan, Chicago lawyer and former chief muni officer in the SEC Chicago Regional office. His predictions should have Providence Mayors Angel Taveras, Jorge Elorza and David Cicilline very concerned.
MCDC Architect Chan's Muni Enforcement Predictions
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Chan said he believes there has been no slowing of momentum for muni enforcement since MCDC’s end - and that regulators may become even more aggressive going forward.
“I think it is quite safe to say that there continues to be consensus and momentum on SEC enforcement of the municipal securities market,” Chan said.
New SEC chair Jay Clayton has been historically receptive to the idea of holding individuals accountable, Chan said, which is in line with what the SEC has been trying to shift towards - either charging the firm or issuer (public) officials or explaining why it declined to do so.
“If entities commit fraud that means individuals commit fraud,” Chan said. “There will be a focus on that.”
The SEC has sharpened the tools it uses to hold individuals to account. The commission can charge individuals for “causing” others to violate securities laws, and it can also use the doctrine of “control person liability,” which the SEC deployed to charge the mayor of Allen Park, Mich. in November 2014. Control person liability comes from section 20(a) of the Securities Exchange Act of 1934 and provides that an individual may be liable for the securities law violations of persons over whom they exercise control.
Providence has been Misleading Bond Investors for Years
There is no question in my mind that Providence and its actuaries and officials have been misleading taxpayers, retirees, the State and Municipal Investors regarding the true financial condition of the City. Only recently has Providence stopped redirecting employee contributions to pay other services or obligations. This expressly illegal in the ERISA world but allowed in the St Joseph's, Providence City Hall world of mirrors. Chan says that practice may be under close scrutiny. “They basically ask a very holistic question: who are the people who contributed to the disclosure problems?”
From my perspective, if that happens to be Mayor Cicilline, Taveras or Elorza and/or other officials they will all hopefully be charged with abusing the public trust and even, securities fraud, which is a felony. Chan said he has observed an increasing willingness of the SEC to go after “gatekeepers” such as auditors in other markets, and expects that trend to carry over to the muni market.
The SEC last year charged a New York-based audit firm and one of its senior partners in connection with municipal bond offerings by the town of Ramapo, N.Y. Bond lawyers might increasingly become targets of prosecution in some instances, too, Chan warned.
When it comes to battling public corruption, the DOJ might be looking to increasingly take a page out of the SEC’s playbook, Chan added. While courts have ruled that traditional criminal public corruption, charges require evidence of a quid pro quo, the securities laws, which can also be the basis of criminal charges, do not. Prosecutors merely have to show that an official withheld a material fact, including a conflict of interest.
There is no question hiding the facts of City Finances helped Mr. Cicilline get his Congressional seat. That’s a huge abuse. Taveras tried the same thing. Maybe Elorza and his team will come clean during an “outside” forensic investigation of finances in Providence. If anyone has evidence of financial corruption and appropriation of pension dollars used for Municipal services they should contact the SEC and cc’ me.
Michael G. Riley is vice chair at Rhode Island Center for Freedom and Prosperity and is managing member and founder of Coastal Management Group, LLC. Riley has 35 years of experience in the financial industry, having managed divisions of PaineWebber, LETCO, and TD Securities (TD Bank). He has been quoted in Barron’s, Wall Street Transcript, NY Post, and various other print media and also appeared on NBC News, Yahoo TV, and CNBC.
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