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SEC's First-Ever Fine Against Municipal Bond Issuer

Yesterday the SEC announced that, for the first time in its history, it has fined a municipal bond issuer for making misleading statements in an offering statement.  The SEC also fined the underwriter and its lead investment banker, as well as the project developer and its CEO.  The case is a pointed reminder that municipal debt offerings are also subject to the securities laws and can be fraught with pitfalls.  The case involved the Greater Wenatchee Regional Events Center Public Facilities District, a municipal corporation formed in 2006 by nine Washington cities and counties to fund development of a regional multi-use arena and hockey rink, the Town Toyota Center, in the city of Wenatchee, Washington.  After the District issued nearly $42 million in bond anticipation notes to fund the project, the arena failed to meet revenue projections, and the District went into default on the notes in December 2011.  The SEC then launched an investigation and found that the official statement for the bond anticipation notes was materially false and misleading.  Among other problems, the official statement failed to inform investors that the city's obligations under any related contingent loan agreement would be limited by the city's remaining debt capacity.  The official statement also stated that no feasibility report had been done on the arena's projected financial performance, when in fact an independent consultant had examined the financial projections and had raised questions about its economic viability.  The SEC noted that such financial feasibility reports should have been disclosed under applicable industry standards.

The SEC brought administrative proceedings against the District, the District contracts manager who signed the certification for the official statement, the developer, and its CEO, alleging that they had violated Section 17 of the Securities Act of 1933 by making material misstatements or omissions and/or engaging in a transaction that operated as a fraud or deceit on the purchaser.  The SEC noted that negligence alone is sufficient to support a violation of the statute.  In addition to undertaking certain remedial steps, the District paid a $20,000 fine, and the developer and its CEO each paid $10,000 fines.

The SEC also brought administrative proceedings against the underwriter and its lead investment banker.  The SEC noted that, by participating in an offering, an underwriter makes an implied recommendation that it has a reasonable basis for belief in the truthfulness and completeness of the key representations made in any disclosure documents used in the offerings.  The SEC fined the underwriter $300,000 and fined the lead banker $25,000.  None of the parties admitted any wrongdoing.

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Chip Phinney