By Tim Dulaney, PhD, FRM and Tim Husson, PhD
Yesterday, the Securities and Exchange Commission (SEC) charged the Greater Wenatchee Regional Events Center Public Facilities District, a group of nine cities and counties in Washington state, with misleading investors in connection with a bond offering meant to finance the construction of an event center. According to the press release, this is " the first time that the SEC has assessed a financial penalty against a municipal issuer."
In 2008, the municipal issuer issued nearly $42 million in municipal bonds to finance the Town Toyota Center in Wenatchee, WA. In the official statement (PDF), the issuer claimed that the financial projections had not been "examined by any financial adviser or by any accounting or other firm in order to verify [...] the reasonableness of the assumptions". The municipality failed to disclose that an independent consultant had twice provided financial projections for the event center that were pessimistic about the center's economic viability. Rather than disclosing these projections, the issuer relied upon "optimistic assurances [of] civic leaders". The events center ended up underperforming the optimistic projections in the offering documents.
In addition, the SEC alleges that the issuer mislead investors by omitting information about the limited debt capacity of the city. This limited debt capacity constrained the city's ability to repay the 2008 bonds when they matured in 2011. As a result, Greater Wenatchee Regional Events Center Public Facilities District defaulted on payment of principal on the notes in December 2011. The municipal issuer has been ordered to pay a $20,000 penalty for its transgressions related to the 2008 bonds.
In addition, the bond's underwriter, Piper Jaffray & Co., was censured and fined $325,000 for "fail[ing] to develop a reasonable basis for believing the accuracy of key representations made in the official statement." Piper Jaffray must also "retain an independent consultant to conduct a review of the firm’s municipal underwriting due diligence policies and procedures as well as its supervisory policies and procedures relating to municipal underwriting due diligence." For more information, see the SEC's order (PDF).
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