WASHINGTON — The Securities and Exchange Commission is stepping up its enforcement efforts in the municipal securities market for the first time in more than a decade, with a staff of roughly 30 attorneys charged with investigating and trying muni and public pension fund cases.

The first of the enforcement actions may become public by as early as this summer, Elaine Greenberg, associate regional director of the SEC’s Philadelphia office who is heading the unit with her deputy, Mark Zehner, said in an interview with The Bond Buyer earlier this month.

“There’s a recognition that investors in this particular market need the protection of the SEC,” she said.

As the new unit moves forward, its roughly 30 attorneys are meeting at the Philadelphia office this week for an intensive boot camp on tax, accounting and other issues unique to the municipal market and public pensions. Greenberg and Zehner characterized the week-long session as a way of ensuring the same basic level of understanding about munis and pensions.

“The point of this is to create a group of experienced lawyers who can quickly and efficiently zoom in on the important stuff and not get lost with various red herrings,” Zehner said. “We don’t want attorneys spinning their wheels wasting time being inefficient because they’re learning for the first time about something called an official statement that sort of looks like a prospectus but isn’t.”

In contrast to a much more informal working group within the enforcement division that the pair also previously headed, the new unit has significantly more resources.

They include a formal presence in 10 of the 12 regional SEC offices — all except Denver and Salt Lake City, which may still pursue muni cases on their own, in consultation with the unit.

In addition to the 30 attorneys selected from within the SEC to work on municipal and public pension fund cases, the enforcement unit plans to hire two outside individuals who have muni banking or trading experience, Greenberg said.

While the scope of the unit is broad, she said it would significantly expand on the relatively limited case law in the muni area by bringing enforcement actions in five specific areas of misconduct. These are: offering and disclosure fraud; tax or arbitrage-driven fraud; pay-to-play practices and public corruption; fraud involving valuation and pricing; and public pension accounting and disclosure violations.

And while some of the attorneys slotted to work in the unit are still finishing up investigations in other areas, Greenberg and Zehner said they believe there will likely be plenty of work for them on municipals and public pension cases.

Zehner said that his optimistic side would like to believe there are too few abuses in the muni market to warrant this kind of focus.

“There’s another part of me that’s perhaps a little bit more cynical, more experienced, that says, 'No, I think there’s going to be more than enough work there for the 30,’ ” he added.

Build America Bonds

Greenberg declined to comment on whether the SEC is conducting a broad investigation of Build America Bonds. It is examining a $600 million Build America Bond deal sold by the Metropolitan Water Reclamation District of Greater Chicago last year, Bloomberg News recently reported.

However, she said that as the municipal market shifts to greater issuance of taxable bonds, “I would not assume ...  that we would not have an enforcement interest and want to be sure that disclosures being made in connection with any bonds ...  are being made adequately.”

“I don’t want to give the impression that these BABs are somehow inherently problematic,” Greenberg said. “But it is a new product, the volume has been very high … and they’ve really taken off. We just want to make sure that there is full and fair disclosure being made to investors or municipalities.”

Though the two SEC officials refused to comment on any specific disclosure issues they could be looking at with regard to BABs, commission sources said that, hypothetically, if an underwriter is deliberately flipping bonds, it could be misrepresenting the issue price in the certification it provides the issuer on pricing. Flipping occurs when a dealer purchases securities and then immediately resells them at higher prices.

“You can see disclosure problems here in theory that don’t necessarily go to what’s contained within the four corners of the official statement,” one SEC official said, stressing that he is “very much speaking in the theoretical.”

On BAB deals, the price is key to determining the interest rate for the issuer and dictates the subsidy rate of the payment the Internal Revenue Service will make to the issuer.

The rate is currently set at 35% of interest costs. Issuers worry that if the IRS finds their BABs do not comply with the tax rules on issue price, it could withhold their subsidy payments.

The SEC’s interest in BABs come as commission officials have already met twice with IRS officials under a memorandum of understanding the two agencies signed in March. The MOU commits the two agencies to meet at least quarterly to more closely monitor and regulate the municipal market.

Greenberg said she could not discuss the topics that have come up at the meetings, but hinted they may have focused on BAB pricing and disclosure issues.

“When you think about what are the trends going on in terms of the municipal securities marketplace and how that dovetails with what may be the IRS’ interest in the tax treatment of these products, then you could infer what the subject matters could be for some of these discussions,” she said.

Officials from the IRS’ tax-exempt bond office have been suggesting that BAB issuers or their advisers track their trades and prices on Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system and check whether their underwriters were accurate in certifying that all of the bonds were publicly offered at the initial offering price.

They said last month that they plan to audit up to half of all BAB transactions, but have since backtracked from those statements and now insist that a full audit footprint won’t be known until later this year.


In addition to the MOU with the IRS, Greenberg said that the new unit will benefit from a series of measures the SEC announced in January, when it formally unveiled the muni unit, along with four other specialized teams.

The SEC also announced three kinds of formal agreements under which individuals and companies can alert the commission to abuses and cooperate with its civil investigations.

The SEC also announced a streamlined process for submitting witness immunity requests to the Justice Department, which conducts criminal investigations.

“The muni unit would be very receptive if we were to be approached by counsel or an individual that had information that they wanted to disclose to us about a possible violation of the federal securities laws,” Greenberg said. She added that while the SEC has depended on whistleblowers in the past, these formalized agreements provide greater incentives for them to come forward.

Greenberg, 49, has worked in the enforcement division since joining the SEC during the week of the October 1987 stock-market crash. She cut her teeth on municipal cases a decade later, a yield-burning case against Reading, Pa.-based Meridian Securities, which ultimately settled the matter for $3.7 million.

At issue were Meridian’s price markups on Treasury securities that municipalities in Pennsylvania and West Virginia bought and placed in escrow to advance refund previously issued debt.

Zehner, 50, joined the SEC as an attorney-fellow in its Washington headquarters in 1997, leaving a partnership at Saul Ewing LLP.

After commuting to the SEC’s office in Washington from his suburban Philadelphia home each day for two years, Zehner joined the Philadelphia office at the beginning of 1999 as regional municipal securities counsel.

Asked about a former Meridian official, Martin Stallone, who became a managing director at Investment Management Advisory Group Inc., or IMAGE, and has been named as a key participant in an industry-wide bid-rigging conspiracy alleged in civil suits brought by more than a dozen California localities, Greenberg said generally that “some firms and individuals are always finding new and different ways to violate the federal securities laws.”

Stallone was censured, ordered to pay $100,000 to issuers and the Treasury, fined $15,000 and suspended for 24 months from association with any broker-dealer, investment adviser, or investment company, in a settlement of SEC charges that he excessively marked up Treasuries for refunding escrows and falsely certified they were sold to the issuers at fair market value.

He neither admitted nor denied the charges but was ordered to cease and desist from further violations of the securities laws.

Greenberg declined to comment more broadly on the ongoing parallel Justice Department and SEC probe into anticompetitive behavior in connection with municipal derivatives and guaranteed investment contracts.

No criminal charges have been brought against IMAGE, though the Federal Bureau of Investigation raided their Pottstown, Pa., offices, along with the offices of two other brokers, in November 2006.

Since the establishment of the new unit, Greenberg and Zehner have spoken at several industry conferences where their claims that there is widespread misconduct in the muni market have been criticized.

But Greenberg strongly defended the need for the specialized unit.

There are organizations like the National Association of Bond Lawyers who contribute to best practices of bond counsel nationwide and “who are out there talking to their members or constituents as to how to get it right and not run afoul of the securities laws,” she said, while adding that there are always going to be other attorneys and industry participants that do not have those goals in mind.

“They really either operate around the edges or they intentionally set out to engage in misconduct and defraud their customers or their clients in order to enrich themselves,” she said. “That’s something that from an enforcement perspective we frequently see.”

Focus on Munis Disputed

Zehner also disputed another criticism voiced by some market participants: that the SEC is misusing its resources by focusing on municipals given that they did not play a central role in the financial crisis and that investors have generally not lost significant sums by investing in them.

“Some say that there aren’t many investors that have lost money,” he said. “But it doesn’t mean that there isn’t a lot of fraud going on. It means it hasn’t mushroomed to the point where there’s billions of dollars lost and frankly ... one of our goals is [to bring cases] before everybody’s already lost their money such that we’re simply closing the barn door after the horse is gone.”

Though the SEC’s interest in the municipal market is expanding, Greenberg noted that its enforcement authority is limited to the antifraud provisions of the securities laws and it is unable to regulate issuers directly.

Asked if the antifraud provisions are sufficient to police the muni market, Greenberg said it is not her place to suggest any legislative changes.

However, she noted that commissioner Elisse Walter plans to hold a series of field hearings on municipal securities that will likely address the SEC’s limited enforcement authority in the muni market, among other topics.

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