SEC charges Harrisburg with making fraudulent and misleading public statements

The U.S. Securities and Exchange Commission earlier this week charged Pennsylvania’s capitol city with making fraudulent and misleading public statements in the midst of financial hardship.

The SEC announced that an internal investigation found that the misleading statements were made during a particularly troubling financial period for the City of Harrisburg.

The misleading statements, the SEC charges, were made in the city’s budget report, annual and mid-year financial statements, and during a State of the City address.

The charges, which the city has agreed to settle, marked the first time the SEC has charged a municipality for misleading statements made outside of its securities disclosure documents, according to a commission news release issued on May 6.

The SEC found that Harrisburg failed to comply with requirements to provide ongoing financial information and audited financial statements for the benefit of investors who hold hundreds of millions of dollars in bonds issued or guaranteed by the city.

Due to Harrisburg’s non-compliance between the years of 2009 to 2011, investors were forced to seek out the city’s other public statements in order to ascertain current information concerning the city’s financial condition, the SEC reported.

The only financial information that was publicly available at the time, however, was that which was contained on the city’s website, including its 2009 budget, State of the City address, and mid-year fiscal report, but those documents either misstated or failed to disclose what the SEC terms “critical information about Harrisburg’s financial condition and credit ratings.”

“In an information vacuum caused by Harrisburg’s failure to provide accurate information about its deteriorating financial condition, municipal investors had to rely on other public statements misrepresenting city finances,” George S. Canellos, co-director of the SEC’s Division of Enforcement, said in a statement. “Statements that are reasonably expected to reach the securities markets, even if not prepared for that purpose, cannot be materially misleading.”

In her own statement, Elaine C. Greenberg, chief of the SEC’s Enforcement Division’s Municipal Securities and Public Pensions Unit, said, “A municipal issuer’s obligation to provide accurate and timely material information to investors is an ongoing one. Because of Harrisburg’s misrepresentations, secondary market investors made trading decisions based on inaccurate and stale information.”

Due to its near-bankrupt condition, Harrisburg is currently under state receivership largely due to about $260 million in debt the city had guaranteed for upgrades and repairs to a municipal resource recovery facility owned by The Harrisburg Authority, and as of mid-March of this year, the city has missed about $13.9 million in general obligation debt service payments, the SEC reported.

According to the SEC, Harrisburg has not submitted annual financial information of audited financial statements since submitting its 2007 Comprehensive Annual Financial Report to a Nationally Recognized Municipal Securities Information Repository in the beginning of 2009.

“Therefore, the SEC’s order finds that at a time of increased interest in the [sic] Harrisburg’s financial health due to the deteriorating financial condition of The Harrisburg Authority, the city created a risk that investors could purchase or sell securities in the secondary market on the basis of incomplete and outdated information,” the SEC’s news release states.

The SEC’s order forces the city to cease and desist from committing or causing violations of the Securities and Exchange Act.

The commission, in devising the settlement, considered Harrisburg’s cooperation in the investigation and the “various remedial measures” implemented by the capitol city to prevent further violations of securities laws, the release states.

The city has neither admitted nor denied the findings of the investigation, according to the SEC.