The Port Authority of New York and New Jersey (port authority) recently paid a $400,000 penalty and admitted to wrongdoing in order to settle charges with the Securities Exchange Commission (SEC). The action stemmed from the port authority’s failure to properly inform investors about the risks relating to bonds issued in connection with a roadway project. Andrew Calamari, director of the SEC’s New York Regional Office commented, “[t]he Port Authority represented to investors that it was authorized to issue bonds while not disclosing significant known risks that its actions were not legally permitted.”
The SEC found that the port authority issued $2.3 billion in bonds for certain roadway projects, despite the fact it knew it might not have had legal authority to do so, and that an investor might challenge the bond issuance as a result. The offering documents for the bonds omitted any reference to the port authority’s doubts or the resulting risk to investors of a challenge to the legal authority for the bond issuance. According to the SEC, omission of these risks resulted in a violation of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, which make it illegal for any person to “obtain money or property by means of any untrue statement of a material fact or any omission of material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.” Calamari warned, “Municipal bond issuers must ensure that their disclosures are complete and accurate so that investors can make fully informed decisions about whether to invest.”
The settlement highlights the importance of assuring clear legal authority for bond issues and of accurate disclosure documents. The SEC release discussing the settlement may be read in its entirety here. If you have any questions regarding legal authority to issue bonds or the information that must be disclosed in an offering document made pursuant to a bond issuance, please contact your Dinsmore & Shohl public finance attorney.