The U.S. Securities and Exchange Commission (SEC) charged Monday the City of Harrisburg, Pennsylvania, with fraud for allegedly misleading public statements and financial information.

SEC US SecuritiesAndExchange Commission Seal

First time for SEC

The case marks the first time the SEC has charged a municipality for misleading statements made outside of its securities disclosure documents.

According to SEC, its investigation found that the misleading statements were made in the City of Harrisburg’s budget report, annual and mid-year financial statements, and a State of the City address. The SEC also found that the beleaguered capital city of Pennsylvania, Harrisburg failed to comply with requirements to furnish certain ongoing financial information and audited financial statements for the benefit of investors holding hundreds of millions of dollars in bonds issued or guaranteed by the city.

The City of Harrisburg, which is under state receivership and has missed $13.9 million in debt-service payments, neither admits nor denies the findings in the order. However, Harrisburg has agreed to settle the SEC charges.

According to SEC, due to City of Harrisburg’s non-compliance from 2009 to 2011, investors had to seek out Harrisburg’s other public statements in order to obtain current information about the city’s finances. For instance, Harrisburg had not submitted annual financial information or audited financial statements since submitting its 2007 Comprehensive Annual Financial Report (CAFR) to a Nationally Recognized Municipal Securities Information Repository (NRMSIR) in January 2009.

George S. Canellos, Co-Director of the SEC’s Division of Enforcement remarked: “In an information vacuum caused by Harrisburg’s failure to provide accurate information about its deteriorating financial condition, municipal investors had to rely on other public statements misrepresenting city finances.”

Stephen Reed was mayor from 1982 to 2010. Current Mayor Linda Thompson said the SEC investigation was settled without a law suit in the courts, and without any monetary sanctions being assessed against the city. She said the city has completely revamped its policies and procedures for financial disclosures to prevent recurrence of such failure in the future.

Interestingly, the SEC separately issued a report today addressing the disclosure obligations of public officials and their potential liability under the federal securities laws for public statements made in the secondary market for municipal securities.

The city of about 50,000 defaulted on debt it guaranteed and lost a bid for bankruptcy. Harrisburg’s fiscal woes stem from an overhaul of a trash-to-energy incinerator that didn’t generate enough revenue to pay off its debt, which is more than five times the city’s general-fund budget.