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 JFV@WardandSmith.com or JimV@eLearnSuccess.com. Or you can check out my eLearning course at http://www.elearnsuccess.com/start.aspx?menuid=3075 or http://www.youtube.com/user/eLearnSuccessor or you can purchase my books
at http://www.amazon.com/Jim-Verdonik/e/B0040GUBRW
[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.
WOW!
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 JFV@WardandSmith.com or JimV@eLearnSuccess.com. Or you can check out my eLearning course at http://www.elearnsuccess.com/start.aspx?menuid=3075 or http://www.youtube.com/user/eLearnSuccess or you can purchase my books at http://www.amazon.com/Jim-Verdonik/e/B0040GUBRW
No comments:
Post a Comment