SEC accuses municipal leaders of securities fraud

Miami readers of this blog have learned of many instances of stockbroker misconduct or misrepresentations. In such cases, an investment professional may have breached his or her fiduciary duty by failing to inform potential investors of all the risks associated with various investment options. Today’s posting offers a unique twist on that paradigm. Instead of private sector financial advisors, the alleged wrongdoer is a municipality.

Many American cities raise revenue by selling municipal bonds. Such transactions are subject to applicable securities laws, and will also require disclosure statements to be filed with the U.S. Securities and Exchange Commission. In fact, the SEC has a separate unit devoted to oversight of such municipal securities activity.

In this case, however, SEC officials charged a particular municipality with fraud, relating to the city’s disclosures provided to investors and/or taxpayers. The SEC issued a cease and desist order to the city. Although the order did not name individual city leaders, such officials might not be immune from liability. Similar to the advice offered by stockbrokers in the private sector, city officials have a fiduciary duty to provide accurate financial information to their constituents, taxpayers and potential investors.

SEC officials based their accusation on numerous city presentations, including an annual state of the city address, a budget proposal, and a mid-year financial statement. City officials also failed to disclose in another financial report that the city’s outstanding debt had resulted in a downgrade of its credit rating.

When investors rely to their detriment on the incomplete advice proffered by their stockbroker or brokerage firm — or city officials, in the case of municipal securities — they may be able to recover their losses through a securities fraud lawsuit.

Source:, “SEC charges Pennsylvania’s capital city with fraud,” Lisa Lambert and Hilary Russ, May 6, 2013