For Second Time Ever, a U.S. State is Accused of Securities Fraud
Apparently individuals and companies are not the only ones who can be accused of securities fraud. For only the second time ever, the Securities and Exchange Commission accused a U.S. state of securities fraud.
The New York Times reported that the SEC accused the State of Illinois of misleading investors about the condition of the public pension system. According to the SEC, Illinois had claimed that it was properly funding the retirement plans for public workers when, in fact, it had not. The SEC cited the time period from 2005 to 2008, during which Illinois also had issued $2.2 billion in bonds.
The lack of contributions raised the risk that at some point Illinois would not be able to pay for both the retirees and the purchasers of the bond. But the purchasers were not notified of this problem based upon the disclosures Illinois was making. This means that the purchasers were overpaying for the bonds.
The SEC settled with the State of Illinois. While the agreement did not impose any fines or penalties, the state did agree to a cease-and-desist order but did not admit or deny the SEC’s accusations.
While there are shortfalls in many state and local pension funds across the country, the SEC can step in only if it believes there has been securities fraud, which is subject to a high standard of proof.
The first fraud action against a state was against the State of New Jersey, which dealt with disclosures that stated there was a special reserve for pension increases.