By Lisa Lambert
WASHINGTON Nov 5 Federal securities regulators on Tuesday fined a municipal debt issuer for the first time ever, charging the seller of bonds used to finance an ice rink that ultimately fell into default with misleading investors about the project's viability.
In the strongest signal yet that it is serious about clamping down on misbehavior by municipal bond issuers, the U.S. Securities and Exchange Commission extracted a $20,000 penalty from a special facilities district in the city of Wenatchee, Washington, about 140 miles east of Seattle.
Piper Jaffray & Co, the bank that arranged the sale of the $41.8 million of bonds in 2008 and one of the largest underwriters in the $3.7 trillion municipal bond market, was also fined $300,000, the SEC said.
The developer, its former president and the top banker on the deal were also fined, and a district staff member was rebuked, the SEC said. No one charged, however, admitted or denied the SEC's findings.
The charges mark the eighth case the SEC has brought in the municipal market this year as it seeks to forge stricter investor protections. The commission chair who took office in April, Mary Jo White, has picked up the banner of making sure those investors, typically retirees, understand what they are buying.
Until now, however, the SEC has refrained from levying fines against bond sellers for fear of effectively penalizing taxpayers who had no role in the transgression. In this case, though, no taxpayer funds will be used to pay the fine.
"Financial penalties against municipal issuers are appropriate for sanctioning and deterring misconduct when, as here, they can be paid from operating funds without directly impacting taxpayers," said Andrew Ceresney, co-director of the SEC's Division of Enforcement, in a statement.
The SEC determined that the Greater Wenatchee Regional Events Center Public Facilities District failed to make material disclosures in the official statement for bond anticipation notes sold in 2008, including an independent consultant's questions about the economic viability of the project being financed, the SEC said.
Official statements summarize new bond sales for investors.
In December 2011, the district defaulted on the securities, which financed a new hockey arena and events center.
While the Piper Jaffray fine is in line with other recent penalties, it comes less than a month since an SEC official warned underwriters they must make sure their clients keep up with disclosure obligations.
"Piper Jaffray & Co failed to develop a reasonable basis for believing the accuracy of key representations made in the official statement," Mark Zehner, deputy chief of the SEC Enforcement Division's Municipal Securities and Public Pensions Unit, said in a statement.
Piper Jaffray is one of the biggest players in municipal debt issuance in the country and acted as underwriter or financial adviser on more than $10 billion of bond transactions in the sector in 2012, according to its web site.
Piper's lead investment banker on the deal, Jane Towery, settled related charges by agreeing to pay a $25,000 fine and to refrain from having any contact with a prospective municipal issuer client for a year, the SEC said.
Developer Global Entertainment and its former president Richard Kozuback will also pay $10,000 each. Meanwhile, Allison Williams, who certified the accuracy of the official statement while working for the district, consented to a cease-and-desist order.
"My clients neither admitted nor denied the allegations," said Victor D. Vital Greenberg Traurig, a Dallas-based attorney for Kozuback and Global Entertainment. "They believe the resolution was a positive one for them."
Lawyers for the other individuals in the case were not immediately able to comment.
For decades, many in the municipal market believed a section of securities law called the Tower Amendment exempted the market from strict federal regulation.
Recently the SEC has embraced a literal interpretation of the amendment as only prohibiting it from requiring issuers to file statements before selling bonds and has pushed hard to ensure states, cities, schools and other issuers provide bond buyers with accurate and timely information.
This year, the SEC has brought a groundbreaking case against an Indiana school district over false claims in an official statement as well as landmark charges against Harrisburg, Pennsylvania, based on officials' public comments.