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SEC Probes Bankrupt San Bernardino, California’s Finances

A U.S. Securities and Exchange Commission “informal inquiry” of San Bernardino, California’s finances requires the bankrupt city to preserve bond documents and communications with underwriters.

The nature of the agency’s inquiry isn’t detailed in the Oct. 11 letter from Robert H. Conrrad, a Los Angeles-based SEC senior enforcement counsel, to City Attorney James Penman. It calls on city officials to preserve all records of securities offerings and written communications with underwriters, fiscal advisers and credit-rating companies.

“There are a lot of areas that need to be covered by the SEC,” Penman said yesterday. “The city attorney and the City Council are pleased that they’re coming in to look at things.”

The SEC has stepped up efforts to enforce disclosure rules that apply to states and cities that raise money from investors, and has recommend ways to improve regulation of the $3.7 trillion municipal-bond market.

The agency has also been looking into other municipalities. In a court filing last month, it also asked for records concerning Stockton, California, which is the biggest city ever to file for bankruptcy. In July, the SEC said it may sue Miami over whether it provided adequate financial data to investors when it borrowed through the muni market.

John Nester, a spokesman for the SEC in Washington, declined to comment.

Disclosing Problems

Paul Maco, former director of the SEC’s office of municipal securities, said the agency may be looking to see whether public officials violated securities laws by failing to disclose looming financial problems to investors.

Related slideshow: Stockton, After the Bankruptcy

“It shouldn’t be a surprise that the SEC would take a look -- at least informally -- under its enforcement powers into a municipal bankruptcy,” he said. “They would be looking to see whether there had been any violations of the anti-fraud provisions in the course of the issuers’ past disclosures. Were there conditions that were known but not reported that were material?”

In San Bernardino, a city of 209,000 about 60 miles (100 kilometers) east of Los Angeles, the county sheriff’s Department has said a probe of possible criminal activity in City Hall had begun several months before the city sought Chapter 9 court protection on Aug. 1.

Previous Settlements

Earlier SEC investigations led to agreements with New Jersey, which settled claims in 2010 that the state misled investors by masking the underfunding of its two biggest pension plans, and an accord with San Diego over similar issues. Four former San Diego officials paid penalties as part of that case, a first in a municipal-bond fraud case, the SEC said in 2010.

San Bernardino, the third California city to enter bankruptcy this year, relied on a variety of budgetary maneuvers to stay solvent, such as redirecting money from restricted accounts, Andrea Travis-Miller, the interim city manager, said in a July interview. None of those actions appeared to be illegal, she said then.

In 2009, the SEC sought information about Miami’s transfer of money raised for capital projects to the city’s general fund.

Probe Welcomed

The SEC inquiry is “fine,” Mayor Patrick Morris said by telephone yesterday. Morris, a former judge in criminal and family law courts, said he’s aware of no criminal conduct in city finances.

“As a trial jurist, I never want to predict,” Morris said. “I know of nothing.”

San Bernardino failed to make a $1 million interest payment due Oct. 1 on 2005 taxable pension bonds, according to a Municipal Securities Rulemaking Board filing yesterday by Wells Fargo Bank, trustee for the debt.

The city has about $90 million of outstanding bond debts, according to budget documents, and another $200 million owed to holders of securities issued by the city’s now-dissolved redevelopment agency.

The San Bernardino council voted in July to skip payments of $3.4 million to holders of pension debt as well as $2.2 million owed for retiree health care.

Stockton, the largest U.S. city in bankruptcy, as well as San Bernardino and Mammoth Lakes, have entered court protection from creditors. Stockton and San Bernardino cited downturns in tax revenue related to the housing-market collapse as well as higher employee costs, while Mammoth Lakes pointed to a court judgment involving a developer.

To contact the reporter on this story: James Nash in Los Angeles at jnash24@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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