Mitchell E. Herr. May 5, 2011

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1 The Florida Bar City, County and Local Government Law Section SEC Enforcement Against Municipal Issuers and Public Officials by Mitchell E. Herr May 5, 2011 Copyright 2011 Holland & Knight LLP All Rights Reserved

2 SEC Enforcement Against Muni Issuers and Officials SEC consistently emphasized need for adequate disclosure. SEC noted 2/3 of munis held by individual investors. SEC believes investors have greater trust in muni securities. SEC believes muni investors are entitled to equally good disclosure. Long history of SEC enforcement proceedings against issuers and public officials. Organizational changes and new substantive powers enhance SEC s ability to police municipal market.

3 The SEC s Antifraud Jurisdiction SEC cannot require muni issuers to make specific disclosure, keep accurate books and records or maintain adequate internal control procedures. SEC s only power over muni issuers is its antifraud jurisdiction -- 17(a) of 33 Act & 10(b) of 34 Act. Prohibits muni issuer from making misstatements or omissions of material fact Fact is material if reasonable investor likely would consider important SEC s power over muni issuers can only be employed through blunt hammer of an enforcement action.

4 SEC s Antifraud Jurisdiction SEC can bring civil actions in federal court or in administrative proceedings. SEC can bring actions against: issuer, elected officials, employees, third parties, including underwriter, financial advisor, auditor, and bond and disclosure counsel. Generally, the SEC has only brought actions for intentional or reckless conduct, but its jurisdiction under 17(a) extends to mere negligence.

5 The Costs of an SEC Enforcement Action Historically, SEC has not fined muni issuers. SEC has begun to fine city officials. 10/10 SEC obtained penalties against 4 former San Diego officials One official fined $5k; three officials fined $25k Costs of SEC investigation and enforcement action can be enormous.

6 Costs of an SEC Enforcement Action San Diego In 2002 and 2003, San Diego violated securities laws in connection with 5 bond offerings (over $261 MM). San Diego failed to adequately disclose its liability for pension and retiree health care obligations. Public officials knew, but failed to disclose, that the City would not be able to satisfy its liabilities.

7 Costs of an SEC Enforcement Action San Diego SEC entered cease and desist order against City. San Diego ordered to hire an Independent Consultant to monitor finances ($4 MM) and report to SEC. SEC required City to take necessary steps to adopt, implement and employ Independent Consultant s recommendations.

8 Costs of an SEC Enforcement Action San Diego San Diego lost access to public markets for 5 years. Settlement with SEC prevented city from issuing bonds until it issued current audited financial statements. On January 6, 2009, for the first time in 5 years, San Diego announced a $64 MM bond offering. San Diego incurred $30 MM in investigatory and legal expenses. Former city officials were fined up to $25K.

9 SEC s Organizational Changes SEC Enforcement Division established specialized unit on muni securities and public pensions (1/10). Focusing on: Offering and disclosure fraud Tax or arbitrage-driven fraud Pay-to-play and public corruption violations Public pension accounting and disclosure violations Valuation and pricing fraud

10 SEC s Organizational Changes Specialized unit has more than 25 members in 7 offices around nation. Has conducted training seminars. Noticeable uptick in muni enforcement 1 st case against state (New Jersey) announced 8/10 (regarding pension accounting) Pending pension accounting investigations of Illinois and Rhode Island Several other active investigations around nation

11 SEC s Organizational Changes Office of Municipal Securities Director will report directly to SEC s Chairman. Office will coordinate with the MSRB in rule-making and enforcement actions. Illustrates increased prominence of munis at SEC. SEC can only exercise its antifraud jurisdiction via enforcement action.

12 SEC s New Enforcement Powers Penalty in administrative cease and desist proceedings. Collateral bar. Enhanced Whistleblower protections and bounty up to 30%. Ability to target secondary actors (including city officials). Aiding and abetting Control person liability

13 SEC s New Enforcement Powers Aiding and Abetting Removes any doubt about SEC authority Reduces level of culpability from actual knowledge to knowingly or recklessly

14 SEC s New Enforcement Powers Control Person Makes clear SEC can allege SEC needs to show person had the power to affect relevant policy Control person is liable to the full extent of the primary violator Good faith defense Looks to whether control person established, maintained and enforced proper system of supervision and control SEC may use control person in charge to put at issue issuer s system of supervision and control something it could not do directly

15 How to Stay Out of the SEC s Gun Sights Disclosure is the issuer s obligation. Develop Internal Controls and Systems. Written policies and procedures should identify who is responsible for what outline the process for drafting and reviewing disclosure documents Provide checks and balances on individuals

16 How to Stay Out of the SEC s Gun Sights Provide training to officials and employees Disclosure and financial reporting requirements of federal securities laws and GASB The disclosure significance of information Individuals roles and responsibilities Ensure consistent disclosures are provided to the public

17 How to Stay Out of the SEC s Gun Sights Keep the big picture in mind: to provide full and fair disclosure Identify financial problems and issues Conduct due diligence Carefully scrutinize disclosure documents Disclose bad news as well as good news Hire competent auditors, bond counsel and disclosure counsel Cities often place emphasis on other factors, such as political connections, lowest bid, or giving business to local business persons

18 Mitchell E. Herr Mitchell E. Herr practices exclusively in the area of securities litigation, primarily the defense of SEC enforcement matters and securities class actions, and internal corporate investigations. Mr. Herr joined Holland & Knight after serving for over five years as the chief trial counsel for the SEC s Southeast Regional Office, where he was responsible for the SEC s litigation in eight states and two territories, including the trial of the City of Miami case. Mr. Herr earned his B.A. degree summa cum laude from Dickinson College and received his J.D. cum laude from the University of Chicago Law School.

ALLAN HORWICH CURRICULUM VITAE. (February 2014)

ALLAN HORWICH CURRICULUM VITAE (February 2014) Professor of Practice, Northwestern University School of Law, 2013 - present Senior Lecturer, Northwestern University School of Law, 2000 2013 Partner, Schiff