At least that’s the belief of the Securities and Exchange Commission, which has told city officials that it may sue them for fraud, alleging that they sold the bonds without telling investors enough about mush-rooming costs.
This is only the latest in a string of SEC enforcement actions in municipal finance. Since January, investigators have pursued four cases of alleged bribes, kickbacks and tax-dodging schemes involving local officials and financial firms across the country. Among the penalties: six-figure fines and a 27-month prison term for a Florida utilities official. A key mission of the SEC, says Paul Maco, director of its new municipal securities office, is to protect investors by keeping all markets open and honest. Two dozen other probes are in the works. “Many practices [in this market] belong more to the 19th century than the 20th,” says Maco.
But why the sudden crackdown on this $1 trillion market, which helps build the nation’s roads, bridges and power plants? “Because of the dramatic change in ownership,” says Maco. When you bought munis 10 years ago, whether through a mutual fund or your broker, individuals held less than 40 percent of them, while professionals controlled–and influenced-the rest of the market. Today, individuals hold 70 percent. As more investors need protection, the SEC has made munis its top priority. The main weapon: an anti-fraud law that requires full disclosure of financial information by muni issuers, underwriters and broker-dealers.
Some muni players grumble that the federal government is overdoing it. They say the SEC is moving hastily to combat what it sees as a systemwide deterioration when there are really only pockets of low-level corruption. But agency officials counter that such high-profile cases as the bankruptcy of Orange County, Calif., are proof enough that muni investors face significant risk. And they note that the need for today’s tough rules dates back to debacles like the $2.25 billion default by the Washington Public Power Supply System in 1985, which left investors with less than 50 cents on the dollar. Most of the muni market, though, is only now beginning to catch on to the problem. Says bond watcher Richard Lehmann: “It’s [like] a carcinogen in your food-you’re not aware of it until someone points it out.” The SEC obviously wants to make sure investors are eating healthy.
