Best Best & Krieger News Feed

Harrisburg Charged With Securities Fraud

09 May 2013 00:00:00 -0800

The inclusion of the public statements of an elected official in allegations of securities fraud could change the traditional relationship between the politicians and their constituency versus issuers and the bond market. Monday, Harrisburg, Pa. made history as the first municipality charged with securities fraud for misleading statements made outside of its securities disclosure. Pennsylvania’s capital, a distressed municipality currently in receivership, failed to provide continuing disclosure, including audited financial statements or material event notifications from 2009 to 2011. Harrisburg is also charged with making misleading statements about its downgraded credit rating and outstanding debt payments. The SEC claims that Harrisburg created an “information vacuum” forcing investors to rely on other public statements, including the Mayor’s State of the City address, which misrepresented the city’s finances.

The charges set a precedent for all municipalities required to disclose material market data, including yearly budgets and comprehensive financial reports, on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system. Under the Securities and Exchange Act of 1934, municipal issuers have an ongoing duty to provide accurate and timely public disclosures that inform the trading decisions of market investors. Any information “reasonably expected” to reach the securities market cannot be misleading, even if the statements are not “explicitly intended” for investors. Harrisburg’s adopted budget, posted on the city’s website and the former mayor’s 2009 State of the City address, allegedly fell under these criteria and drove investors to make decisions based on “inaccurate and stale” information. In the corporate sector, public statements by CEOs are often vetted by lawyers and accountants.

Rule 15c2-12 sets forth disclosure obligations relating to municipal issuers and is designed to provide accurate information to investors after bonds have been issued and to prevent fraudulent, deceptive or manipulative practices. The SEC’s investigation of Harrisburg focused on its failure to comply with its continuing disclosure requirement, misstatements regarding payment of $455 million in debt which it had guaranteed, and reference to this “additional challenge” as one that could be “resolved.” Harrisburg has not admitted or denied the SEC findings, but has agreed to desist from future violations and is cooperating with the Commission in taking steps to strengthen transparency. Issuers of public debt should be on notice that non-compliance with continuing disclosure requirements could create an environment in which the investment community relies on public statements.

For more information on this case or its implications for your agency, please contact Public Finance attorney Kim Byrens or your Best Best & Krieger attorney.

Disclaimer: BB&K legal alerts are not intended as legal advice. Additional facts or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information in this communiqué.

California Supreme Court Allows Class Actions for Local Tax Refunds

02 May 2013 00:00:00 -0800

The California Supreme Court recently ruled that local tax refund claims may be pursued as class actions, even where a city has an existing ordinance prohibiting such claims. The ruling is broad enough to expose local governments to class action refund claims for many other types of local taxes, as well as for assessments, charges and fees. Without legislative amendments from Sacramento, local budgets could be seriously impacted by similar refund claims in the coming years. Local governments are advised to review their taxes, assessments and other revenue sources to ensure that they comply with applicable law, including Propositions 218 and 26.

In McWillams v. City of Long Beach, a class of plaintiffs sought a refund of the city’s local Telephone Users Tax (TUT) on grounds that from 2006 to 2008, the city’s TUT ordinance contained an exemption for telephone service that was also exempt from payment of Federal Excise Tax (FET). The FET exemption is outdated “landline-era” language resulting in a 21st Century loophole that has sparked class action refund litigation in several California cities. Cities with older TUT ordinances (which likely include the outdated FET exemption) should consider voter-approved updates to eliminate potential exposure to TUT refund claims.

In July, 2011, the California Supreme Court ruled on nearly the same issue in Ardon v. City of Los Angeles, where it also held that plaintiffs may bring a class action for a local TUT refund. As in McWilliams, plaintiffs were claiming a TUT refund based upon the outdated FET exemption in Los Angeles’ ordinance. The Ardon court held that class action refund claims are allowed under the California Government Claims Act (Act) absent a specific refund procedure set forth in any applicable governing claims “statute.” Because Los Angeles did not have a local ordinance prohibiting class action refund claims, the Court did not decide whether an ordinance may serve as a “statute” that can prohibit a class action. (Note that, in response to Ardon, Best Best & Krieger advised its clients at the time to adopt similar ordinances out of an abundance of caution.)

Because Long Beach had a local ordinance prohibiting class actions, the Court directly addressed this issue in McWilliams. Based upon the plain reading of the Act, the Court held that a “statute” governing claims must be a federal or state law, not a local ordinance. The Court further held that Long Beach’s status as a charter city did not alter this result. Therefore, a local ordinance prohibiting class actions (even for charter cities) is no longer effective. Absent a specific federal or state law governing the refund process, the Act applies and a class action for a refund is allowed.

Many forms of local taxes, assessments, fees and charges do not have a specific refund procedure under federal or state law. Therefore, McWilliams allowsthese revenue sources to be challenged by class action litigation. While each individual refund claim may only amount to a few dollars, the “economies of scale” of class actions may encourage more refund litigation.

If you have any questions regarding this case or its implications for your city or local government, please contact your BB&K attorney, Kelly Salt, Michael Mullins or William J. Priest.

School Districts Cannot Spend Bond Money on Projects Not Disclosed to Voters

01 May 2013 00:00:00 -0800

The Fourth District Court of Appeal recently upheld a challenge to a school district’s spending voter-approved bond proceeds for field lighting at a high school stadium because the ballot proposition did not specifically list or otherwise include field lighting as a project to be funded by the bonds for that high school. As a result, the school district is prohibited from using the bond proceeds to fund the lighting improvements. Taxpayers for Accountable School Bond Spending v. San Diego Unified School District emphasizes the importance of ensuring that the project list included in a bond measure sufficiently identifies the improvements to be constructed with the bond proceeds.

In 2008 the San Diego Unified School District (SDUSD) submitted a school bond measure (Proposition S) to the voters. Proposition S contained a bond project list comprised of two parts. Part one allocated a specific amount of the bond proceeds to each school to be spent on qualified, permitted projects. Specific projects to be financed at all school sites included improvements “to support student health, safety, and security.” School site security improvements, “including increased lighting,” were identified as examples of these types of improvements. Part two identified specific projects to be completed at all school sites and at particular schools. Included in the specific list of projects for Hoover High School was the renovation and replacement of the school’s stadium bleachers and press box, and the upgrade of “fields, track, and courts for accessibility compliance.” Proposition S also authorized bond proceeds to be used for construction and other costs incidental to and necessary for completion of the listed projects. Other incidental costs necessary to complete the projects listed in the measure included athletic playing fields and “field lighting.”

SDUSD authorized the installation of new lighting for the Hoover High School stadium to be funded from a portion of the Proposition S bond proceeds. The use of the bond proceeds to fund the lighting improvements was challenged by the plaintiff, for among other reasons, that the stadium lighting improvements were not identified in the Proposition S project list for Hoover High School.

The Court of Appeal noted that the state constitution requires that a school bond that has a 55 percent vote threshold, such as Proposition S, must contain “a list of the specific school facilities projects to be funded.” School districts can seek bonds without such a list, but the bond measures face a higher vote threshold – at least two-thirds. The court held the Proposition S bond proceeds could not be used for the Hoover High School stadium field lighting because: (1) project list included the renovation of the stadium’s seating and press box, but did not expressly include lighting for the field; (2) the upgrade of the field was limited to improvements for accessibility compliance and lighting was not required for this purpose; and (3) field lighting was not incidental to or necessary for the completion of the renovation or replacement of the stadium bleachers or the press box.

For more information about this case or the impact that it may have on your school district, please contact your Best Best & Krieger attorney, Kelly J. Salt or an attorney in the firm’s Public Finance practice group.