UPDATE 1-SEC charges Pennsylvania's capital city with fraud

Mon May 6, 2013 2:36pm EDT

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WASHINGTON May 6 (Reuters) - The U.S. Securities and Exchange Commission charged the Pennsylvania city of Harrisburg, the state's beleaguered capital, with securities fraud on Monday for allegedly releasing misleading public statements and financial information.

Harrisburg, which is under state receivership after its finances became mired by a scheme to upgrade a trash incinerator, agreed to settle the charges without admitting or denying the findings, the SEC said.

The SEC said It was the first time it has charged a municipality for making misleading statements outside of securities disclosure documents. Its investigation covered Harrisburg's budget, annual and mid-year financial statements, and a "State of the City" address.

Alongside the charges, the SEC issued a report saying that public officials may be liable under federal securities laws for public statements made in the secondary market for municipal securities.

The SEC said Harrisburg has already implemented "various remedial measures" to prevent future violations.

According to the SEC, investors had to make trading decisions "based on inaccurate and stale information" about Harrisburg's financial condition during the trash burner crisis, largely because the city did not provide annual financial reports and other notices such as interest payment delinquencies.

The SEC has stepped up its scrutiny of the municipal bond market since last summer, when one of its commissioners, Elisse Walter, released a report that had been years in the making that called for stricter regulatory enforcement and increased investor protection.

Last Monday, the SEC accused Victorville, California, of defrauding investors by, in part, giving them false information about the security of bonds used for an airport hangar project. In March, the SEC settled fraud charges with Illinois over allegations that the state repeatedly misled investors about its underfunded pensions.