Monday, August 5, 2013

Can You Sue Your Mayor for Securities Fraud?


By:  Jim Verdonik
I'm an attorney with Ward and Smith PA. I also write a column about business and law for American Business Journals, have authored multiple books and teach an eLearning course for entrepreneurs. You can reach me at or Or you can check out my eLearning course at or or you can purchase my books at

[This post is based on an article I wrote for Triangle Business Journal published August 2, 2013]
What's the hottest thing in securities fraud?
·         Rich investment bankers selling financially engineered SWAPs to institutional investors?
·         Con men selling guaranteed high returns to widows and orphans?
·         Nigerian princes selling oil deals via email?
No.  Your local City Hall is the hottest thing in securities fraud.
Earlier this year, the Securities and Exchange Commission charged both Harrisburg Pennsylvania and Miami Florida with securities fraud.  With Detroit recently filing a $20 Billion bankruptcy, municipal bond fraud is hitting the big time - expect investor law suits.
How does a city commit securities fraud?
It's always been clear that misstatements or omissions of material facts in the disclosure documents cities give investors when they sell bonds are securities fraud.  But now the SEC is going after cities for misstatements and omissions that officials make outside their formal disclosure documents. 
Can you imagine a world where Government has to be truthful?
Most law suits against big publicly traded corporations are for misstatements or omissions in press releases or ongoing disclosures, not in the registration statements they file with the SEC when they sell securities to the public. 
These ongoing misstatements and omissions mislead investors who are trading securities with other investors.  Likewise, investors trade the bonds governments sell.  So, governments also have ongoing obligations not to mislead investors by misstating or hiding material facts.
And, of course, as Government debt increases, opportunities for really big time securities fraud grow.  A single city can make Bernie Madoff look like an amateur.
What types of omissions and misrepresentations did Harrisburg and Miami make?
Harrisburg stopped providing information about its finances to the public by not disclosing audited financial statements.  Harrisburg also lied on its website to hide its deteriorating financial condition.
Miami played "shell games" with municipal bank accounts by transferring $37.5 million from its capital account to its operating budget to fool people into thinking its operating budget was balanced.  These misrepresentations allowed Miami to obtain a higher credit rating from the rating agencies which reduced the interest Miami had to pay investors.
Governments routinely make more promises than they can keep.  Raising taxes drives away taxpayers.  So, the tax base shrinks and a death spiral occurs until there aren't enough people and businesses to tax. 
All that is perfectly legal.  No one goes to jail for fooling the voters.  But when governments borrow money to try to keep the illusion going as long as they can, they can cross the line into securities fraud when they treat investors like voters.
We're all used to your typical government website or press release accentuating the positive.  But accentuating the positive without disclosing the related negatives is how people usually violate securities laws. 
After a few more prosecutions by the SEC and investor law suits, maybe we'll start seeing government websites and press releases present more balanced pictures of what is happening:
·         The city revitalized downtown while potholes spread all over town.
·         The state increased teacher salaries while test scores stagnated.
·         We lowered the town's unemployment rate by giving city jobs to the mayor's family.
·         We balanced the city's budget by postponing water main repairs that won't leak until our current mayor retires.
·         Crime rates decreased, because we increased waiting times to answer telephones and frustrated people stopped reporting crimes.
Check out your Federal, state and local government websites.  How are they doing at complying with securities laws?
The Constitution's 1st Amendment protects the right of politicians to mislead voters in elections, but securities laws protect investors from government officials lying or hiding material facts.
 So, the next time you ask a government official a question; don't say you are a voter.  Say you are a bondholder.  You might get a more truthful answer.
By the way, challengers remain free to mislead you in election campaigns.  Only incumbent officials are subject to securities laws.
If you would like to learn more about learning how to grow your business or other issues important to your success, you can reach me at or Or you can check out my eLearning course at or or you can purchase my books at








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