(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

City Sanctioned For Fraudulent Municipal Bond Offerings

The SEC sanctioned the city of San Diego for committing securities fraud by failing to disclose information about its pension and retiree health care obligations in the sale of its municipal bonds. To settle the action, the city agreed to cease and desist from future securities fraud violations and to retain an independent consultant for three years to foster compliance with its disclosure obligations under the federal securities laws.

Linda Chatman Thomsen, director of the SEC's Enforcement Division, said "with over $2.2 trillion in municipal securities outstanding--two-thirds of which are held by individual investors--municipal bonds are a vitally important segment of our nation's securities markets," and commented that "this action signifies our resolve to hold state and local governments accountable when they commit fraud while seeking to borrow the public's money. “Randall R. Lee, regional director of the SEC's Pacific Regional Office in Los Angeles, added that San Diego's misconduct jeopardized the interests of its citizens, its current and future retirees, and those who placed their trust in the city's bonds as an investment.

The SEC found that the city's disclosures about its pension and retiree health care obligations and its ability to pay those obligations were misleading. According to the SEC, the city failed to disclose that its unfunded pension plan liability was projected to dramatically increase, growing from $284 million at the beginning of fiscal year 2002 to an estimated $2 billion by 2009, and that the city's liability for retiree health care was another estimated $1.1 billion.

Additionally, the SEC found that the city also failed to disclose that it had intentionally under funded its pension obligations so that it could increase pension benefits while deferring costs. According to the agency, the city would face severe difficulty funding its future pension and retiree health care obligations unless new revenues were obtained, pension and health care benefits were reduced or city services were cut. The city knew or was reckless in not knowing that its disclosures were materially misleading, concluded the SEC order.

The SEC order requires the city to cease and desist from committing violations of the antifraud provisions of the securities laws, and to retain an independent consultant to review and assess its policies, procedures and internal controls about its disclosures relating to municipal bond offerings. The consultant must conduct annual reviews for a three-year period of these matters and make recommendations to promote compliance with the city's disclosure obligations. The city agreed to implement the independent consultant's recommendations or alternatives designed to achieve the same objectives.

In deciding to accept the city's offer to settle this matter, the Commission considered various remedial measures that the city has already taken to detect and prevent future securities law violations, as well as the city's agreement to retain an independent consultant. The city consented to the issuance of the order without admitting or denying the findings, and the Commission's investigation is ongoing as to individuals and other entities that may have violated the federal securities laws.