Compliance August 18, 2010

NJ Hit with Fraud Charges for Pension Funding Disclosure Failures

In the first such action of its kind, the U.S. Securities and Exchange Commission (SEC) charged the state of New Jersey with securities fraud for not properly disclosing when selling municipal bonds that its two largest public pension programs were underfunded.  

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An SEC news release said the charges relate to more than $26 billion worth of municipal bonds offered on 79 occasions between August 2001 and April 2007. New Jersey agreed to settle the case without admitting or denying the SEC’s findings.

According to regulators, the offering documents “created the false impression” that the Teachers’ Pension and Annuity Fund (TPAF) and the Public Employees’ Retirement System (PERS) were being adequately funded. In fact, according to the SEC, New Jersey could not contribute to TPAF and PERS without raising taxes, cutting other services, or otherwise affecting its budget.

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Regulators charged that bond purchasers did not have enough information to determine New Jersey’s ability to fund its pensions or to figure out the impact of that funding on the state’s overall financial situation.

“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, in the announcement. “The State of New Jersey didn’t give its municipal investors a fair shake, withholding and misrepresenting pertinent information about its financial situation.”

 

(Cont...)

Failure to Disclose Specifics  

The SEC said that among New Jersey's material misrepresentations and omissions were that it failed to disclose and misrepresented information about:

  • legislation adopted in 2001 that increased retirement benefits for employees and retirees enrolled in TPAF and PERS;
  • special Benefit Enhancement Funds (BEFs) created by the 2001 legislation initially intended to fund the costs associated with the increased benefits;
  • the state's use of the BEFs as part of a five-year "phase-in plan" to begin making contributions to TPAF and PERS; and
  • the state's alteration and eventual abandonment of the five-year phase-in plan.

Furthermore, the SEC said, the state had no written policies or procedures about the review or update of the bond offering documents and the state did not provide training to its employees about the state's disclosure obligations under accounting standards or federal securities laws.

A New York Times account of the charges said New Jersey’s largest bond underwriters during the period include Citigroup, JPMorgan Securities, Morgan Stanley, Bank of America, Merrill Lynch, Goldman Sachs, and Barclays Capital.

More information about the charges is at http://sec.gov/litigation/admin/2010/33-9135.pdf. 

 

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