In 2008 the Securities and Exchange Commission for the first time filed a complaint for securities fraud against public officials, citing five employees of the city of San Diego with misleading purchasers of the city's bonds. I was struck by the language in the SEC's announcement
The SEC charged the former officials for failing to disclose to the investing public buying the city’s municipal bonds that there were funding problems with its pension and retiree health care obligations and those liabilities had placed the city in serious financial jeopardy.According the Linda Chatman Thomsen, Director of the SEC's Division of Enforcement
Municipal officials responsible for municipal bond disclosure play a key gatekeeper role in protecting investors. It is therefore imperative that they honor the public’s trust by ensuring that investors are provided with accurate, material information about the issuer’s fiscal health.A SEC Regional Director piled on with
Despite knowing of the city’s substantial pension and retiree health care liabilities, these five former San Diego officials failed to disclose what they knew to municipal securities investors. Their actions not only jeopardized the investors, but also compromised the interests of the city’s citizens and its current and future retirees.But it is the next paragraph in the SEC announcement that really resonates
According to the SEC’s complaint, the five former officials knew that the city had been intentionally under-funding its pension obligations so that it could increase pension benefits but defer the costs. They were aware that the city would face severe difficulty funding its future pension and retiree health care obligations unless new revenues were obtained, pension and health care benefits were reduced, or city services were cut. They specifically knew that the city’s unfunded liability to its pension plan was projected to dramatically increase, growing from $284 million at the beginning of fiscal year 2002 to an estimated $2 billion by 2009, and that the city’s liability for retiree health care was another estimated $1.1 billion. But the officials failed to disclose these and other material facts to rating agencies or to investors in bond offering documents and continuing disclosures.In the end, four of the defendants settled the SEC charge by formally acknowledging that they misled the investing public and paying pretty hefty fines. As part of the settlement, they agreed not to seek reimbursement of the fines from others, so the dollars had to come out of their own pockets. The City of San Diego was also sanctioned, the first time ever, and paid big bucks as well as agreeing to sin no more, in order to settle.
Now, what happens if just for the fun of it we substitute federal government for city or San Diego?
The question is, how is this different from what Messrs. Geithner, Bernancke and Obama have been doing in order to keep U. S. Treasuries afloat? Haven't they been intentionally under-funding pension obligations in order to increase benefits but defer costs? Is there anything substantially different from the SEC charge and Obama administration practices?