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SEC charges City of Harrisburg with securities fraud

- Last modified: May 6, 2013 at 2:26 PM

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3:16 p.m. update: City solicitor Jason Hess said the cease-and-desist order from the SEC was not a surprise.

“This has been in the works for awhile,” he said, referring to Mayor Linda Thompson’s statement for further comment on the matter.

If the charges had been prosecuted, monetary sanctions could have been imposed, he said.

3:12 p.m.: Harrisburg Mayor Linda Thompson released the following statement:

"Today marks a turning point in the City's financial history. I have signed, and the United States Securities and Exchange Commission has accepted, the City's Offer of Settlement in connection with the SEC's investigation of the City's financial disclosure process. This resolves the SEC's investigation of the City without a lawsuit in the courts. As the SEC has recognized in the settlement documents, my administration cooperated fully with the SEC's investigation, which has now concluded without any monetary sanctions being assessed against the City.

"The historical facts alleged by the SEC regarding the City's failure to disclose financial information are what they are. But, to prevent such things from happening in the future, and as the SEC is aware, the City has completely revamped its policies and procedures for financial disclosures. These new policies and procedures are designed to ensure that accurate and complete financial information regarding the City's finances is made available to investors and the public in a timely manner. As your Mayor, I am committed to making sure this happens.

"I and all of the members of my administration are happy to have this matter concluded so that we can continue moving forward with the City's fiscal recovery. As a condition of the settlement with the SEC, and as specifically required by section 202.5(e) of Title 17 of the Code of Federal Regulations, I am prohibited by law from discussing this matter further in any public statement."

2:50 p.m.: "It's good to have the matter resolved with the SEC and move forward and remain focused on the recovery plan," said Cory Angell, a spokesman for receiver William Lynch.

He said the receiver was happy to see that the city was not incurring fines as a result.

Initial report

Harrisburg today became the first municipality to be charged by the U.S. Securities and Exchange Commission for misleading statements made outside of its securities disclosure documents.

The SEC announced securities fraud charges today. The city, which has agreed to settle the charges, according to the SEC, is said to have misled municipal bond investors when its financial condition was deteriorating and financial information was either incomplete or outdated.

Calls to city solicitor Jason Hess and a spokesman for receiver William Lynch were not immediately returned.

An SEC investigation found that the misleading statements were made in the city's budget report, annual and mid-year financial statements and a State of the City address.

Harrisburg's noncompliance from January 2009 to March 2011 forced investors to seek out other public statements in order to obtain current information about the city's finances. However, very little information about the city's fiscal situation was publicly available elsewhere, the SEC said.

Information that was accessible on the city's website, such as its 2009 budget, 2009 State of the City address and 2009 mid-year fiscal report either misstated or failed to disclose critical information about Harrisburg's financial condition and credit ratings.

"In an information vacuum caused by Harrisburg's failure to provide accurate information about its deteriorating financial condition, municipal investors had to rely on other public statements misrepresenting city finances," said George Canellos, co-director of the SEC's Division of Enforcement. "Statements that are reasonably expected to reach the securities markets, even if not prepared for that purpose, cannot be materially misleading."

According to the SEC's order instituting settled administrative proceedings, Harrisburg is a near-bankrupt city under state receivership largely due to about $260 million in debt the city had guaranteed for upgrades and repairs to a municipal resource recovery facility owned by The Harrisburg Authority.

As of March 15, Harrisburg has missed approximately $13.9 million in general obligation debt service payments, according to the SEC order.

Read the documents

To read the SEC news release, click here.

To read the SEC report on its investigation, click here.

To read the SEC's cease-and-desist order against the city, click here.

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