State of NJ Charged with Securities Fraud

The U.S. Securities and Exchange Commission (SEC), in a historic first, has accused the state of New Jersey with securities fraud relating to billions of dollars worth of municipal bond offerings, a charge that has never before been leveled at a state government.

According to the SEC, New Jersey offered and sold some $26 billion worth of municipal bonds between 2001 and 2007. In so doing, however, the state failed to disclose material information regarding the underfunding of the Teachers’ Pension and Annuity Fund and the Public Employees’ Retirement System.

Specifically, said the SEC, the state is accused of making material misrepresentations and omissions regarding legislation increasing retirement benefits, the creation and use of special "benefit enhancement funds" in a five-year “phase-in” plan to begin funding the aforementioned pensions, as well as the state’s ultimate abandonment of the plan. All these factors, said the SEC, aligned to create the impression that the state was adequately funding these two pensions which, in turn, masked the state’s overall financial condition.

"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 Division of Enforcement. "The State of New Jersey didn't give its municipal investors a fair shake, withholding and misrepresenting pertinent information about its financial situation."

The state quickly settled with the SEC, though the attorney general said in a statement that New Jersey has not admitted or denied the commission’s accusations by doing so.

For both the state and local governments of New Jersey, debt, especially bond debt, is a way of life – despite its small size, it’s the third most indebted state in the union with a $33.9 billion obligation as of the end of 2009, and has one of the worst debt-to-GDP ratios in the nation, 6.2 percent. This situation has led the current administration to seek drastic cuts in government services, although it still continues a tradition of borrowing all the same.