This speech is certainly making the e-mail rounds today in San Diego. Christopher Cox, the former congressman and current chairman of the Securities and Exchange Commission, used San Diego to make his point: Federal regulators must do more to protect investors in municipal bonds from frauds by governments like ours.

[T]he overall size of the municipal market is enormous. There now are nearly $2.5 trillion of municipal securities outstanding. That’s more than the gross domestic product of China. Last year alone, more than $430 billion of new municipal bonds and notes were issued. That’s roughly the size of the U.S. defense budget. …

Very recently the SEC sanctioned the City of San Diego for committing securities fraud. They failed to disclose to municipal bond investors important information about their pension and retiree health care obligations. San Diego’s offering documents didn’t tell investors that the city’s unfunded liability to its pension plan was projected to grow dramatically – from $284 million at the beginning of 2002 to $2 billion by 2009 – or that the city’s liability for retiree health care was projected to grow to more than $1 billion. Investors had no way of knowing that the city knowingly under-funded its pension obligations so that it could increase pension benefits, while deferring the costs. If investors had known this, they could also have figured out that San Diego was bound to face severe difficulty funding its future pension and retiree health care obligations – a minor little piece of accounting business.

There was more:

The kind of securities fraud that we saw in the case of the Orange County bankruptcy and the San Diego pension scandal not only jeopardized the interests of the many individual investors who placed their trust in the City’s and County’s bonds, but also threatened the pocketbooks of millions of taxpayers, and the security of every one of the municipalities’ current and future retirees.

So City Hall now has a new role: To serve the SEC as a shining example of how a government agency can defraud investors.

This speech shows a bit of the motivation behind the years-long pressure the SEC put on San Diego to air some dirty laundry. It wasn’t ever clear that the SEC actually did any investigating itself but it pushed the city to try to lessen its own future punishment by paying for an investigation (and then another, and then another). And now, the city is the whipping boy for the SEC.


But you have to wonder, if the SEC thinks public officials here “jeopardized the interests of many individual investors” who trusted them, isn’t it pretty reasonable now to ask why the agency hasn’t sanctioned any individual responsible for doing so.

Cox shed light on why he wouldn’t support fining an entity like the city of San Diego:

To an investor whose life’s savings are at risk, it’s small comfort to know that if things go wrong a punishment could be imposed. It’s even less comfort when you consider that if a penalty were imposed as is the case in the corporate context, it would be the defrauded victims themselves who would pay the fine. Municipalities have no money of their own. If the SEC were to fine a municipal issuer, the penalty would be paid in tax dollars from the pockets of law-abiding citizens. Your pockets. In essence, victims would be robbed twice. And then it wouldn’t be just the original victims who would be out their money. It would be all of us.

That makes sense. But again, does that mean there’s no punishment for these kinds of frauds?

When the city settled with the SEC last November, it did so as an entity. Several people asserted that the individuals responsible would be dealt with separately — that the settlement merely protected the citizens of San Diego (the “original victims” of the fraud). In fact, reported this in November:

The resolution of the city’s portion of the investigation also clears the way for the SEC to pursue punishment against individual officials. …

Bowers, the SEC official, said the commission was “diligently pursuing” cases against individuals. He said the commission would normally bring cases against individual officials at the same time as the city, but said the city’s remediation steps paved the way for its early settlement.

“Generally we include individuals, but with all the facts and circumstances in this case it made sense to go ahead and bring the settlement with the city,” he said.

If Cox is going to speak with so much confidence about what occurred in San Diego and that it was a horrible fraud, then he and the agency must have come to some conclusions about who was responsible for it.

I suppose we’ll just have to wait for them to share.


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