Academic journal article
By Huang, Jeffrey S.
American Criminal Law Review , Vol. 39, No. 1
Over the last twenty years, the municipal securities (1) market has evolved from being largely unknown and unregulated to being amongst the foremost regulatory priorities of the Securities and Exchange Commission ("SEC"). (2) Municipal bond investors today stand in contrast to the rather limited group that invested in such bonds twenty years ago--commercial banks, property and fire casualty companies, and wealthy individuals. (3)
Today's market encompasses a far broader range of investors, and because average-income households comprise the largest segment of municipal debt-holders, (4) many commentators have advocated for improved disclosure within the municipal securities market to protect investors. (5) Rule 15c2-12, (6) first promulgated by the SEC in 1989, signaled the formal arrival of a mandatory disclosure regime for municipal securities. (7) The anti-fraud provisions of the 1933 (under [section] 17(a)) (8) and 1934 Securities Exchange Acts (under [section] 10(b)) (9) provide the means of enforcing the disclosure regime governing municipal securities.
In recent years, the SEC has pursued aggressively securities fraud actions (10) against local government officials and political figures ("political officials") (11) in charge of large public works projects issuing municipal bonds to finance such projects. (12) These SEC enforcement actions have led to prosecutions by the United States Government for criminal fraud liability. (13) The recent growth of such fraud actions would appear to be the result of the SEC's commitment to hold municipalities more accountable under the existing disclosure regime. However, while the specter of criminal liability for such political officials may loom large, the vast majority of such prosecutions have resulted in civil enforcement actions or cease-and-desist orders, (14) suggesting that prosecutors may be struggling with the appreciable differences between the context of such political officials' statements and that of private corporate officials made in connection with the offering of private corporate securities.
In the context of political officials, many questions arise relating to the elements of a prosecution for securities fraud beyond just assessing their relative culpability or "evil" intent. (15) Large civic works projects are often massive undertakings, involving both the public and private sectors, government contractors, and myriad political interests who have a stake in or who are affected by the project itself. Who is culpable when the civic works project must account for unforeseen changes or costs? Is it always possible to know everything that "must" be disclosed under the purview of the "total mix of information?" (16) Are statements made by political officials "in connection with" (17) the sale of municipal securities as presently construed under federal securities law? Are such statements more akin to puffery, and do sophisticated, or even average investors really rely on statements made by politicians? What is the nature of a political official's liability when the project spirals out of control, and what are the organizational consequences? And should a political official be criminally liable when putatively inadequate disclosures are made with respect to municipal security offerings used to finance these projects?
The SEC's recent enforcement actions appear to be based on the implicit assumption that a political official's liability should be similar in nature to his private sector counterpart, the corporate officer. This Note argues, however, that because the liability of a political official differs in a number of important respects from that of a corporate officer, the threat of criminal liability for securities fraud may not be as real as it may seem. Existing securities law doctrines or safe harbors can and should be extended to apply to the political officials' unique situation. …