Reply #8: SEC’s New Jersey Fraud Case Seen as Harbinger in Muni Crackdown [View All]

Aug. 19 (Bloomberg) -- The Securities and Exchange Commission’s fraud case against New Jersey may presage a wave of lawsuits seeking to crack down on misdeeds by public officials who raise money in the $2.8 trillion municipal bond market.

New Jersey yesterday settled claims it didn’t disclose to investors that it failed to put enough cash into its two biggest pension plans when it sold $26 billion of bonds from 2001 to 2007. The case is the first SEC fraud charge against a state and follows the creation of a unit set up this year to focus on municipal securities and pension funds.

The New Jersey case began in 2007 after the New York Times published a critical report on the state’s pension accounting. The SEC found the state masked years of pension underfunding by failing to inform investors that $704 million listed as pension payments in documents for 79 bond sales from 2001 to 2007 were actually transfers of money already in the retirement system.

The state also failed to disclose a $2.4 billion loss in the value of pension fund assets in 2001, the SEC said, which “created the false impression” that the Teachers’ Pension and Annuity Fund and the Public Employees’ Retirement System were adequately funded.

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