New Jersey Charged By SEC

by Glen Shapiro, LawAndTax-News.com, New York

20 August 2010

The United States’ Securities and Exchange Commission (SEC) has charged the State of New Jersey with securities fraud for failing to disclose to investors in its municipal bond offerings that it was underfunding the state's two largest pension plans.

According to the SEC's settlement order, New Jersey offered and sold more than USD26bn of municipal bonds in 79 offerings between August 2001 and April 2007. The offering documents for these securities created the impression that the pension funds for its teachers and public employees were being adequately funded.

Those documents, the SEC says, masked the fact that New Jersey was unable to make contributions to those funds without raising taxes, cutting other services or otherwise affecting its budget. As a result, investors were not provided adequate information to evaluate the state's ability to fund the pensions or assess their impact on the state's financial condition.

The SEC's order finds that New Jersey made material misrepresentations and omissions about the underfunding of its pension funds in such bond disclosure documents as preliminary official statements, official statements, and continuing disclosures. It further finds that New Jersey was aware of the underfunding of those funds and the potential effects of the underfunding.

New Jersey is the first state ever charged by the SEC for violations of the federal securities laws. It agreed to settle the case without admitting or denying the SEC's findings.

"All issuers of municipal securities, including states, are obligated to provide investors with the information necessary to evaluate material risks," said Robert Khuzami, Director of the SEC's Division of Enforcement. "The State of New Jersey didn't give its municipal investors a fair shake, withholding and misrepresenting pertinent information about its financial situation."

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