Court Sets Aside SEC's First Muni "Control-Person" Settlement
Earlier this month, the SEC used a "control-person" charge in a settled action against an elected municipal official in connection with municipal bond offering. Enforcement touted that "first" on the Monday after: "An enforcement model with no penalties was not sustainable," Enforcement Director Andrew Ceresney, said during a panel discussion. "The most effective deterrent is individual liability, so we need to be focused on that." (at SIFMA Monday, Nov. 10 as reported Bloomberg) But the SEC's releases, and press coverage of remarks in the days after, did not disclose that the Court vacated the settlement the day after it entered. Judge Cohn vacated his judgment as "improvidently granted." The Court faulted the SEC for not providing "all of the relevant facts," because the filings made "no mention … of the role of financial advisors, underwriters and law firms … involved in the marketing of [the] municipal bonds." The Order is here. The SEC had charged that offering documents for two bond issues knowingly painted too rosy a picture for a $146 million film-studio project, which had been all but abandoned in the face of an undisclosed budget deficit by the time the bonds issued. The Commission sued the ex-mayor and ex-administrator in federal court, asserting "control person" liability for directing and approving the City's bond issues with knowledge the offerings' disclosures were outdated and overly-optimistic. Both men were barred from participating in further municipal-securities offerings and one paid a $10,000 fine. See SEC v. Burtka, No. 2:14-cv-14278 (USDC EDMI Nov. 6, 2014); SEC v. Waidelich, No. 2:14-c-14279 (USDC EDMI Nov. 6, 2014). The suits were the Commission's first use of "control person" liability against elected issuer officials. "When a municipal official … controls the activities of others who engage in fraud, we won't hesitate to use every legal avenue available to us in order to hold those officials accountable," said the Chief of Enforcement's Municipal Securities and Public Pensions Unit. Due to the 11th Amendment and the Tower Amendment to the MSRB's enabling legislation, the SEC cannot regulate municipal issuers directly. But it can, and does, prosecute them for false statements in municipal-securities offerings. Using the expanded reach of its administrative forum authorized by Dodd-Frank reforms, the SEC typically charges issuers with negligent violations of anti-fraud rules in settled administrative proceedings including "go-forth-and-sin-no-more" cease and desist provisions, without monetary penalties. See In the Matter of City of Allen Park, Michigan, Rel. Nos. 33-9677; 34-73539 (Nov. 6, 2014). The original SEC Press Release is here. Our initial blog post covered it, here. Thomas K. Potter, III ( is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Managing Partner of the Nashville office, Tom is licensed in Tennessee, Texas and Louisiana. He has over 28 years' experience representing financial institutions in litigation, regulatory and compliance matters. © 2014 by Thomas K. Potter, III (all rights reserved)
Posted in: MSRB, SEC
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