Feds charge PA capital city with fraud

HARRISBURG — Federal investigators say city of Harrisburg officials misled the public and investors about how bad the municipality's finances really were.

The Securities Exchange Commission on Monday charged the city of Harrisburg with securities fraud in connection with misleading financial statements made to the public. The SEC said the misinformation meant investors risked dealing in securities based on incomplete or outdated knowledge.

The city has reached a settlement with the federal agency and will implement new policies to prevent such inaccurate information from being made public in the future, according to the court order.

According to the SEC, Harrisburg officials made misleading statements and omitted relevant information in the city's budget report, annual and mid-year financial statements. That violated the anti-fraud provisions of the Exchange Act.

"These public officials' statements were the principal source of significant, current information about the issuer of the security and thus could reasonably be expected to influence investors and the secondary market," the SEC said in a report detailing the charges.

The announcement marks the first time the SEC has charged a municipality for making misleading statements in places other than financial disclosure documents.

The SEC cites the 2009 State of the City address during the Mayor Stephen Reed administration. The address didn't give the full picture about the city's debt obligations from the Resource Recovery Facility, or trash incinerator, according to SEC investigators.

"The address only discussed the municipal resource recovery facility as a situation that was an 'additional challenge' and an 'issue that can be resolved,'" says the report. "By this time, Harrisburg knew that the (Harrisburg) Authority had failed to secure the requested rate increase, making it likely that Harrisburg would have to repay $260 million of the debt as guarantor."

The order also details the city's settlement negotiation, which is free of financial penalties. Harrisburg has agreed to enhance its financial disclosure policies, which didn't exist during the time of the investigation. That involves formal written policies and annual employee training on compliance.

THOMPSON: Harrisburg Mayor Linda Thompson said her administration cooperated fully with SEC investigators.

Harrisbrug Mayor Linda Thompson,who signed the settlement, said in a statement her administration "cooperated fully" with investigators.

"The historical facts alleged by the SEC regarding the City's failure to disclose financial information are what they are," Thompson said. "But, to prevent such things from happening in the future, and as the SEC is aware, the City has completely revamped its policies and procedures for financial disclosures."

Thompson's statement also said she is prohibited by law from commenting further on the matter.

The SEC order characterizes Harrisburg as "a near-bankrupt city," due in part to $260 million from the incinerator project. The city's finance are under a state receivership, the only such setup in the state. As of March, the state had missed $13.9 billion in general obligation bonds debt payments.

Among the misleading or inaccurate information mentioned in the report:

Such evidence means investor decisions may have been based off of inaccurate information, the SEC said.

"In an information vacuum caused by Harrisburg's failure to provide accurate information about its deteriorating financial condition, municipal investors had to rely on other public statements misrepresenting city finances," George S. Canellos, co-director of the SEC's Division of Enforcement, said in a statement. "Statements that are reasonably expected to reach the securities markets, even if not prepared for that purpose, cannot be materially misleading."

Contact Melissa Daniels at melissa@paindependent.com