And the SEC Wonders Why Investors Think It's Spineless

The Securities and Exchange Commission accusing the state of Illinois of securities fraud is an SEC self-parody at its finest.

The Securities and Exchange Commission accused the state of Illinois of securities fraud as part of a settlement disclosed today. The case is an SEC self-parody at its finest.

The SEC didn't sue any individuals, as if the so-called fraud occurred by itself. The state of Illinois neither admitted nor denied the agency's findings, meaning the allegations remain unproven. The only penalty was an SEC order prohibiting the state from engaging in the same sorts of infractions again -- like breaking the law was somehow permissible before. The SEC only rarely sues repeat offenders for violating such "obey-the-law" directives, so these have little if any practical meaning.

On top of that, the alleged infractions amounted to fraud in name only. The SEC accused the state of violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. Under those provisions, the SEC would only have to prove negligence, not intentional fraud. ("Negligent fraud" remains one of the great oxymorons of U.S. legalese.)

In its administrative order, the SEC said the state "misled bond investors about the adequacy of its statutory plan to fund its pension obligations and the risks created by the state's underfunding of its pension systems." The case is similar to one the agency filed against the state of New Jersey under a 2010 settlement. The SEC didn't punish any actual people in the Garden State either.

Why didn't the SEC sue any individuals? In an e-mail, an SEC spokesman, Kevin Callahan, said: "Decline comment beyond the charges we did bring. Thanks."

If the SEC had a good explanation, I have no doubt he would have been eager to say what it was.

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