The Securities and Exchange Commission today for the first time charged a state–New Jersey–with violating securities fraud laws by failing to disclose to bond investors that it was underfunding its two largest pension plans.
New Jersey agreed to settle the case without admitting or denying the SEC’s findings and said it will cease and desist from committing such further violations.
“All issuers of municipal securities, including states, are obligated to provide investors with the information necessary to evaluate material risks,” said Robert Khuzami, director of the SEC’s enforcement division. “The state of New Jersey didn’t give its municipal investors a fair shake, withholding and misrepresenting pertinent information about its financial situation.”
According to the SEC, New Jersey sold 79 bond issues totaling $26 billion between August 2001 and April 2007 that created the false impression that the Teachers’ Pension and Annuity Fund and the Public Employees’ Retirement System were adequately funded.
The faulty disclosures masked the fact that New Jersey was unable to make contributions to the two pension plans without raising taxes, cutting other services or otherwise affecting its budget. As a result investors were not given sufficient information to be able to evaluate the state’s ability to fund its pensions or to assess the impact of the pension plans on the state’s financial condition.