SEC Charges 36 Firms for Fraudulent Muni-Bond Offerings

The Securities and Exchange Commission last week brought enforcement actions against 36 municipal underwriting firms for violations in municipal bond offerings. The cases are the first to be brought against underwriters under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, a voluntary self-reporting program targeting material misstatements and omissions in municipal bond offering documents. 

First announced by the SEC’s Enforcement Division in March 2014, the initiative offers favorable settlement terms to municipal bond underwriters and issuers who self-report securities law violations. The first issuer charged under the initiative settled with the SEC in July 2014.

“The MCDC initiative highlights the importance of continuing disclosure in the municipal bond market and due diligence in the underwriting process,” said Andrew Ceresney, Director of the SEC’s Enforcement Division.  “The initiative has brought much needed attention to these issues and has already improved the behavior of participants in the $3.7 trillion municipal bond market.” 

In the latest actions, the SEC alleged that between 2010 and 2014 the 36 firms violated federal securities laws by selling municipal bonds using offering documents that contained materially false statements or omissions about the bond issuers’ compliance with continuing disclosure obligations. The underwriting firms also allegedly failed to conduct adequate due diligence to identify the misstatements and omissions before offering and selling the bonds to their customers. 

Continuing disclosure provides municipal bond investors with information, including annual financial reports, on an ongoing basis.  The SEC’s 2012 Municipal Market Report identified issuers’ failure to comply with their continuing disclosure obligations as a major challenge for investors seeking information about their municipal bond holdings.

LeeAnn Ghazil Gaunt, Chief of the Enforcement Division’s Municipal Securities and Public Pensions Unit, said the settlements reflect the “underwriters’ cooperation in self-reporting their own misconduct and agreeing to improve their procedures going forward.”

Settlement Details

The 36 firms, which did not admit or deny the findings, agreed to cease and desist from such violations in the future.  Under the terms of the MCDC initiative, they will pay civil penalties based on the number and size of the fraudulent offerings identified, up to a cap based on the size of the firm. 

The maximum penalty imposed is $500,000, which ten firms will pay. These firms include Citigroup Global Markets, Goldman Sachs, J.P. Morgan, Merrill Lynch, Morgan Stanley and five more.

The second highest penalty imposed was $250,000, to be paid by seven firms, including The Baker Group, B.C. Ziegler and Company, BOSC, City Securities, and more. Other settlement amounts ranged from $60,000 (the lowest penalty amount) to $240,000 (the third highest penalty amount). A complete list of those 36 firms, and the penalty amounts they've each agreed to pay, can be found here.

In addition, each firm agreed to retain an independent consultant to review its policies and procedures on due diligence for municipal securities underwriting. 

The MCDC initiative, which is continuing, is being coordinated by Kevin Guerrero of the Enforcement Division’s Municipal Securities and Public Pensions Unit.