By Lisa Lambert and Hilary Russ
WASHINGTON/NEW YORK, May 6 (Reuters) - Federal regulators on Monday accused Pennsylvania's beleaguered capital, Harrisburg, of committing fraud, in a move that officials said is meant to send a warning to local officials about the accuracy of financial information they provide to investors and taxpayers.
It is the first time the U.S. Securities and Exchange Commission has charged a municipality for making misleading statements outside of the disclosure documents provided in bond sales.
Harrisburg agreed to settle the charges without admitting or denying the findings in the SEC's order to cease and desist. The city did not pay any monetary penalty as part of the settlement and the SEC did not name any particular individuals.
The case should "emphasize to public officials who wish to avoid personal liability under federal securities laws that they should take steps to reduce the risk of misleading investors," said Elaine Greenberg, chief of the municipal securities and public pensions unit at the SEC's enforcement division.
She declined to say whether the SEC will consider charging any individuals in the Harrisburg case.
The SEC unearthed inaccurate, misleading or missing information in various city presentations, including a budget, a mid-year financial statement and a State of the City address.
Among other alleged omissions and late filings that span several years and two mayoral administrations, Harrisburg officials allegedly failed to mention in a 2008 financial report that a major Wall Street credit rating agency had downgraded the city's outstanding debt, the SEC said.
"There was a dearth of information out there regarding Harrisburg's financial condition at a time when Harrisburg should have been making investors aware of its troubles," Greenberg told Reuters.
Alongside the charges, the SEC issued a report saying that local officials may be liable under federal securities laws for public statements made in the secondary market for municipal securities.
Greenberg said the SEC issued the report "to broadly address these issues that have never been addressed before."
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 calling for stricter regulatory enforcement and increased investor protection.
That has led to a campaign of naming and shaming of municipalities by the regulator.
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.
James Spiotto, head of the bankruptcy group at the law firm Chapman and Cutler in Chicago, said that "whenever the SEC takes a position on a matter, it's a reality check for those in the market."
The accusation could further damage Harrisburg's credibility in the $3.7 trillion U.S. municipal bond market as it seeks to reassure investors and finish implementing its recovery plan.
The city is now finalizing the sale and lease of various city assets - including its troubled trash incinerator, which sank it into debt that now tops $340 million.
Harrisburg went bankrupt in October 2011, but state lawmakers later blocked the bankruptcy and a judge threw it out.
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. That was largely because the city did not provide annual financial reports and other notices such as interest payment delinquencies.
For example, Harrisburg's 2009 budget indicated that Moody's Investors Service had a top-notch rating of triple-A on its debt, based on its bond insurance. But by December 2008, Moody's had announced its downgrade of the city's general obligation bond rating to junk at Baa1, the SEC said.
Under Mayor Linda Thompson, Harrisburg has tried to catch up on financial filings it should have made years ago - in particular, its comprehensive financial reports - but the city's 2011 report has still not been published.
Thompson's office referred questions to the city's law department, which did not reply to a message seeking comment.
Former Mayor Steven Reed also did not reply to an email seeking comment.
Thompson took office in January 2010 after ousting Reed, who occupied the job for 28 years. Thompson is now seeking to defend her position in this year's Democratic primary elections.
One of the rival candidates, independent bookstore owner Eric Papenfuse, said the SEC's findings "expose a continuing pattern of fraudulent and misleading practices."
A previous state-appointed receiver for Harrisburg requested a criminal probe into the incinerator deals. A local prosecutor told The Patriot-News in April that a criminal investigation is still a possibility.