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SEC targets North Slope Borough over false statements during bond sales

  • Author: Alex DeMarban
  • Updated: August 24, 2016
  • Published August 24, 2016

Federal market regulators issued a cease-and-desist order against the North Slope Borough on Wednesday as part of a nationwide effort to crack down on "material misstatements" in documents associated with municipal bond sales.

The disclosure violations were self-reported by the borough, according to the SEC. The violations occurred in bond offerings in 2011 and 2012 when the borough made false statements about its past compliance with financial disclosure requirements, according to a settlement with the Securities and Exchange Commission and the borough.

The borough erred when it did not divulge to investors that on several occasions over the five previous years it had failed to file financial information in a timely manner, according to the settlement.

The settlement does not provide a fine, and there is no admission of wrongdoing by the borough. The settlement calls for the borough to take remedial steps to prevent the problem in future bond sales, a step that borough officials say has already occurred.

Officials with ratings agencies on Wednesday indicated that the borough's credit rating — AA2 at Moody's, AA- at Standard & Poor's and AA at Fitch — would not be impacted by the SEC action.

"The borough's failure to meet its continuing disclosure requirements is an unfortunate oversight but this settlement is not likely to weaken the borough's strong financial profile or its AA bond ratings," said Andrew Ward, Fitch's primary analyst for the borough.

Ward said he's never had any problem getting access to information about the borough.

"The borough comes to market annually and provides full financial and economic updates to Fitch, as well as frank and meaningful discussions with management about financial strategy and risks to the organization's sustainability," he said.

Randy Hoffbeck, head of the Alaska Department of Revenue, served as the borough's finance director between 2006 and 2011. Financial information was filed late on several occasions during those years, according to the settlement.

Hoffbeck also signed the borough's official bond statements in 2011. Hoffbeck said the borough's fiscal report and other detailed information was always part of the statement as required.

Hoffbeck said on Wednesday he was not aware of the SEC settlement, or that deadlines had been missed under his leadership.

"It was always a struggle to get everything out the door, but we took our audits and our financial statements very, very seriously. I had every indication everything had been filed on time," he said.

Andy Stemp, the borough's director of administration and finance, said no harm was done to investors or the borough.

He said the borough for years has disclosed timely financial information in a variety of ways to the sophisticated firms that have bought the borough's bonds, such as Goldman Sachs.

But the regulations changed without the borough's knowledge, requiring the information be filed with a new repository, the Municipal Securities Rulemaking Board's public access website, known as Electronic Municipal Market Access (EMMA), Stemp said.

"We had a regulatory change and we missed it," he said. "We're a small issuer in a remote location, relying on the bank and lawyers."

According to the website, the SEC made EMMA the "official repository" for municipal bond disclosures in 2009.

With about 9,500 people spread across an area larger than Minnesota, the borough has a debt of about $430 million. The borough issued $108 million in general obligation debt in 2011 and $92 million in 2012. The money was marked to pay for such things as roads, educational facilities and sewage treatment facilities.

The SEC announced on Wednesday that it had brought similar enforcement actions against 71 municipal issuers and nonprofits across the nation for issuing bond-sale documents between 2011 and 2014 that contained materially false statements or omissions. The borough's settlement was the only one in Alaska.

The SEC settlement with the borough requires the adoption of appropriate policies and training to meet disclosure requirements and the designation of an officer to ensure compliance. Stemp said those steps have been taken.

Recognizing that the settlement would not be punitive, the borough decided not to spend money fighting the agency, Stemp said.

"We said, 'Let's spend our money taking care of elders and school lunches, rather than fighting with the SEC,' " he said.

The SEC did not respond to a request for an interview.

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