Chan Makes Muni Case Pre­dic­tions

The Bond Buyer - - Front Page - BY KYLE GLAZIER

PHOENIX – The Se­cu­ri­ties and Ex­change Com­mis­sion and De­part­ment of Jus­tice are primed to pros­e­cute high-rank­ing public of­fi­cials, bond lawyers, and other non-tra­di­tional tar­gets of mu­nic­i­pal bond en­force­ment cases, ac­cord­ing to a former SEC en­force­ment divi­sion lawyer.

That is the pre­dic­tion of Peter Chan, a lawyer in the Chicago of­fice of Mor­gan Lewis who spent some 20 years with the SEC, in­clud­ing as chief muni en­forcer in the com­mis­sion’s Chicago re­gional of­fice.

Chan was the ar­chi­tect of the SEC’s Mu­nic­i­pal­i­ties Con­tin­u­ing Dis­clo­sure Co­op­er­a­tion ini­tia­tive, which in­cen­tivized is­suers and deal­ers to self-re­port in­stances in which is­suers made mis­lead­ing state­ments about their past com­pli­ance with con­tin­u­ing dis­clo­sure agree­ments.

In a lengthy interview with The Bond Buyer, Chan said he be­lieves there has been no slow­ing of mo­men­tum for muni en­force­ment since MCDC’s end and that reg­u­la­tors may be­come even more ag­gres­sive going for­ward.

“I think it is quite safe to say that there con­tin­ues to be con­sen­sus and mo­men­tum on SEC en­force­ment of the mu­nic­i­pal se­cu­ri­ties mar­ket,” Chan said.

While some mar­ket par­tic­i­pants had won­dered if the com­mis­sion’s at­ti­tude might shift with the de­par­ture of former chair Mary Jo White, known as an ag­gres­sive crim­i­nal prose­cu­tor, Chan said that it ap­pears new SEC chair Jay Clay­ton is on board with the en­force­ment divi­sion’s agenda and with projects like the MCDC ini­tia­tive.

“Read­ing the tea leaves, he does not have any prob­lem with the ini­tia­tive,” Chan said.

Repub­li­cans like Clay­ton have been his­tor­i­cally re­cep­tive to the idea of hold­ing in­di­vid­u­als ac­count­able, Chan said, which is in line with what the SEC has been try­ing to shift to­wards for sev­eral years in ei­ther charg­ing firm or is­suer of­fi­cials or ex­plain­ing why it de­clined to do so.

“If en­ti­ties com­mit fraud that means in­di­vid­u­als com­mit fraud,” Chan said. “There will be a fo­cus on that.”

The SEC has sharp­ened the tools it uses to hold in­di­vid­u­als to ac­count.

The com­mis­sion can charge in­di­vid­u­als for “caus­ing” oth­ers to vi­o­late se­cu­ri­ties laws, and it can also use the doc­trine of “con­trol per­son li­a­bil­ity,” which the SEC de­ployed to charge the mayor of Allen Park, Mich. in Novem­ber 2014.

Con­trol per­son li­a­bil­ity comes from sec­tion 20(a) of the Se­cu­ri­ties Ex­change Act of 1934 and pro­vides that an in­di­vid­ual may be li­able for the se­cu­ri­ties law vi­o­la­tions of per­sons over whom they ex­er­cise con­trol.

“The Public Fi­nance Abuse Unit can use that to go up the chain,” Chan said. “Not only will they fo­cus on in­di­vid­u­als, they will look into how far up they can go. They’re not going to want to go af­ter just a low-tier bu­reau­crat.”

The SEC has charged a num­ber of public of­fi­cials over the years, but that has rarely ex­tended to the up­per floors of city hall.

The com­mis­sion will not seek to charge an in­di­vid­ual that way ev­ery time, Chan said, but will al­ways be ask­ing the ques­tion of whether it should be and tak­ing a “holis­tic” view of ev­ery case.

“They ba­si­cally ask a very holis­tic ques­tion: who are the peo­ple who contributed to the dis­clo­sure prob­lems?”

Chan said he has ob­served an in­creas­ing will­ing­ness of the SEC to go af­ter “gate­keep­ers” such as au­di­tors in other mar­kets, and ex­pects that trend to carry over to the muni mar­ket. The SEC last year charged a New York-based au­dit firm and one of its se­nior part­ners in con­nec­tion with mu­nic­i­pal bond of­fer­ings by the town of Ramapo, N.Y. Bond lawyers might in­creas­ingly be­come tar­gets of pros­e­cu­tion in some in­stances, too, Chan warned.

Last month, when the SEC charged Ok­la­homa-based mu­nic­i­pal ad­vi­sor Mu­nic­i­pal Fi­nance Ser­vices with breach­ing its fidu­ciary duty, the or­der men­tioned that one of­fend­ing con­tin­u­ing dis­clo­sure doc­u­ment was pro­duced by bond a bond lawyer “who is now re­tired and no longer prac­tic­ing law.”

Chan said that could be read as a jus­ti­fi­ca­tion from the SEC as to why it was not pur­su­ing charges against the lawyer, though it could have been con­tem­plat­ing them.

“I thought that was a bit of a hint,” Chan said. The SEC also charged the founder and pres­i­dent of the firm as well as its vice pres­i­dent.

When it comes to bat­tling public cor­rup­tion, the DOJ might be look­ing to in­creas­ingly take a page out of the SEC’s play­book, Chan added.

While courts have ruled that tra­di­tional crim­i­nal public cor­rup­tion charges re­quire ev­i­dence of a quid pro quo, the se­cu­ri­ties laws, which can also be the ba­sis of crim­i­nal charges, do not. Pros­e­cu­tors merely have to show that an of­fi­cial with­held a ma­te­rial fact, in­clud­ing a con­flict of in­ter­est. Pros­e­cu­tors could make the case that an of­fi­cial should have dis­closed a gift from, or fi­nan­cial re­la­tion­ship with, a party to a bond trans­ac­tion, Chan said.

“The DOJ is going to get pretty in­ter­ested in us­ing fed­eral se­cu­ri­ties law to go af­ter public cor­rup­tion,” Chan said. ◽

“Not only will they fo­cus on in­di­vid­u­als, they will look into how far up they can go,” said former SEC en­force­ment of­fi­cial Peter Chan.

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