Can the SEC Get Its Street Cred Back?

The Securities & Exchange Commission was criticized by lawmakers for failing to uncover Bernard Madoff's $65 billion Ponzi scheme and other investigatory lapses. So a crackdown on abuses in the $2.8 trillion U.S. municipal bond market would be a welcome development right about now at the SEC.

Chairman Mary Schapiro is counting on an associate director in the agency's Philadelphia office to deliver the goods. That would be Elaine Greenberg, a 20-year SEC veteran who is leading one of the most ambitious municipal bond market investigations since the 1990s. Now she's looking into whether banks, such as JPMorgan Chase (JPM) and Bank of America (BAC), colluded with brokers to artificially lower the promised return of proceeds raised in municipal debt offerings. She's also looking at public officials who hire political contributors as investment advisers—and local governments that fail to disclose their true financial condition. "There's some very egregious conduct that goes on," says Greenberg, whose late-'90s probe into improper Treasury-bond price markups in the muni market led to 21 firms paying $170 million in penalties.

Greenberg, 49, was tapped in January to head the SEC's municipal securities and public pensions unit, one of five task forces created after the global credit crisis. The 2008 collapse of the $330 billion auction-rate securities market left governments and investors with debt they couldn't trade. States and cities are now dealing with more than $1 trillion in budget and pension deficits.

Municipal securities enforcement "was terribly neglected in recent years," says Arthur Levitt, SEC chairman from 1993 to 2001. "Fraud in the municipal market and incompetence, which in some ways is worse than fraud, has never been greater," he said. (Levitt is a director of Bloomberg LP, parent of Bloomberg News.) Some 70% of the debt in the municipal market is held by individual investors.

A graduate of Temple University and its law school, Greenberg is looking into possible price collusion by brokers that allowed banks to pay municipalities artificially low interest rates on the cash they raised from bond sales. The commission has informed companies including JPMorgan Chase, Bank of America, UBS (UBS), Wachovia (WFC), and General Electric Capital's (GE) Trinity Funding Co. unit (all of which declined to comment) that it determined sufficient wrongdoing occurred to warrant civil charges.

The SEC has also stepped up enforcement of a rule barring securities-firm executives from making political donations to win municipal business. It said on Mar. 18 that the so-called pay-to-play ban applies to corporate officers after it found an unidentified JPMorgan Chase vice-chairman had raised funds for former California Treasurer Phil Angelides in 2002, less than two years before the bank's securities unit underwrote $15.8 billion of state bonds. JPMorgan Chase consented to the inquiry's conclusions without admitting or denying wrongdoing, the SEC said.

In November, two former JPMorgan Securities managing directors were sued by the SEC for alleged pay-to-play deals that allowed the New York-based bank to get $5 billion of bond and interest-rate swap business from Jefferson County, Ala. The transactions nearly bankrupted the state's most populous county. The bankers have asked the judge to dismiss the case.

Greenberg says the municipal market deserves regulatory scrutiny since federal law exempts state and local issuers from the disclosure required of companies, putting public-bond holders at a disadvantage. "When a municipality or a state or any local issuer goes out and seeks to raise money, it's critical they adequately disclose their liabilities," Greenberg says.

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