Illinois Charged With Securities Fraud

There are times when I don’t know whether to laugh or to cry. The Securities and Exchange Commission has charged the state of Illinois with securities fraud:

Washington, D.C., March 11, 2013 — The Securities and Exchange Commission today charged the State of Illinois with securities fraud for misleading municipal bond investors about the state’s approach to funding its pension obligations.

An SEC investigation revealed that Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition. The state also misled investors about the effect of changes to its statutory plan.

Illinois, which implemented a number of remedial actions and issued corrective disclosures beginning in 2009, agreed to settle the SEC’s charges.

“Municipal investors are no less entitled to truthful risk disclosures than other investors,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement. “Time after time, Illinois failed to inform its bond investors about the risk to its financial condition posed by the structural underfunding of its pension system.”

Elaine Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, added, “Regardless of the funding methodology they choose, municipal issuers must provide accurate and complete pension disclosures including the effects of material changes to their pension plans. Public pension disclosure by municipal issuers continues to be a top priority of the unit.”

According to the SEC’s order instituting settled administrative proceedings against Illinois, the state established a 50-year pension contribution schedule in the Illinois Pension Funding Act that was enacted in 1994. The schedule proved insufficient to cover both the cost of benefits accrued in a current year and a payment to amortize the plans’ unfunded actuarial liability. The statutory plan structurally underfunded the state’s pension obligations and backloaded the majority of pension contributions far into the future. This structure imposed significant stress on the pension systems and the state’s ability to meet its competing obligations – a condition that worsened over time.

I don’t much care whether the officials involved were elected, appointed, or hired. The people of the state of Illinois have a right to expect their civil servants to comply with the law. That’s the minimum standard of performance not the maximum standard. By their malfeasance the state has not only become subject to SEC fines but to who knows how much in legal costs, vulnerability to civil suits, and judgments.

We’ve reached the point where everybody in the entire hierarchy that’s involved here should be deemed unfit and ineligible for office.

9 comments… add one
  • Icepick Link

    The people of the state of Illinois have a right to expect their civil servants to comply with the law.

    Wait, what? Have I fallen into an alternate Universe where Illinois isn’t know for corrupt public officials?

  • There’s obeying the law and obeying the law and corruption and corruption. What Blagojevich and Ryan engaged in was petty corruption, what might be termed “retail crime”. This is fraud with potentially serious repercussions for the whole state. That’s wholesale crime if anything is.

  • steve Link
  • PD Shaw Link

    The odd thing about this is that I don’t think there is anything in this complaint that Illinoisians did not know from reading the newspapers. The Illinois Republican Party filed a complaint with the SEC in 2005 that the state was milsleading the credit agencies and this charge was published in the October 25, 2005 edition of the Bond Buyer:

    It seems like you could go a few different ways with this. One way is that the SEC is not regulating financial disclosures in any meaningful fassion when a complaint is followed by four more years of violations while the SEC investigates. Another is that there were no serious SEC violations, nobody but a fool could ever have been fooled and the SEC has too much time on its hands.

  • TastyBits Link

    @Dave Schuler

    In places where corruption is normal, I have described “honest crooks” as those who just take a little off the top, or as Don Fanucci said, “I don’t want a lot. Just enough to wet my beak.”

    Chicago and Illinois seem like home away from home. Is alcohol available 24/7? Is it available at the convenience store? Are butter and heavy cream required ingredients? If so, I may need to move.

  • Another explanation is that the SEC is behaving like bureaucrats and acting so as to make an irritant go away.

    My concern is that the charge will open the gates for a flood of lawsuits by purchasers of Illinois bonds claiming injury. Even if the suits have no merit they’ll still incur costs. If they are found to have merit the costs will be even higher.

  • Icepick Link

    Nice semi-obscure reference, TB.

  • Drew Link

    PD says:

    “The odd thing about this is that I don’t think there is anything in this complaint that Illinoisians did not know from reading the newspapers.”

    Heh, just what I was thinking. Now as to the bond buyers, the question is was their misrepresentation, or what normal people would call “fraud.”

  • PD Shaw Link

    There was apparently a similar SEC order entered against New Jersey in 2010. According to the SEC, NJ “created the false impression that [its pensions] were being adequately funded, masking the fact that New Jersey was unable to make contributions to [its pensions] without raising taxes, cutting other services or otherwise affecting its budget.” I cannot find any secondary litigation with google.

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