Muni-bond headlines posted across the nation over the past eighteen months or so have all boiled down to this: Investors need to be very cautious when considering investing in municipal bonds. Two recent SEC cases provide stark examples of this.
In April, the SEC charged the City of Victorville, Calif. and others with defrauding investors by selling municipal bonds based on inflated property valuations.
According to the complaint, “the inflated figure allowed the Airport Authority to issue substantially more bonds and raise more money than it otherwise would have. It also meant that investors were given false information about the value of the security available to repay them.”
This month, the SEC accused the City of Harrisburg, Penn. of making false statements to investors.
According to the complaint, the City of Harrisburg, Penn. failed to submit annual financial information or audited financial statements to the proper authorities after January 2009.
"Because of Harrisburg's misrepresentations, secondary market investors made trading decisions based on inaccurate and stale information," said Elaine C. Greenberg, Chief of the SEC's Enforcement Division's Municipal Securities and Public Pensions Unit.
Both cities’ allegedly fraudulent behavior affected millions of dollars worth of municipal bonds. In the case of Harrisburg, the city’s alleged misrepresentations and lack of disclosure affected investors holding hundreds of millions of dollars in bonds issued or guaranteed by the city.
In December of 2012, the SEC said that assessing municipal bond credit risk could help investors protect themselves from loss in the muni bond market. However, these recent cases against Victorville and Harrisburg indicate that credit risk isn’t the only issue affecting municipal bond investors. Investors interested in purchasing such bonds would be wise to proceed with great caution.
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