On April 14, the Department of Justice charged the supervisor of Ramapo, New York (the city’s top elected official), and the former executive director of the Ramapo Local Development Corp. with criminal securities fraud for allegedly defrauding thousands of municipal bond investors.  The charges relate to alleged misstatements and omissions made about Ramapo’s financial condition in connection with $150 million worth of municipal bonds.  Both men were also named in a parallel civil suit by the U.S. Securities and Exchange Commission (“SEC”), along with the town of Ramapo, the Ramapo Local Development Corp., the town attorney, and the deputy finance director.

While these arrests are the first of their kind, this is just the beginning of a strategic shift in the government’s crackdown on fraud in the $3.7 trillion municipal bond market.  Over the past few years, the SEC has focused on bringing enforcement actions against municipal underwriters, issuers, and officials, although the SEC settled some of the early cases without demanding fines.  The SEC has recently started extracting significant penalties from alleged fraudsters.  To date, the SEC has resolved cases against a diverse group of defendants, including some of the largest investment banks.  On June 18, 2015, Goldman Sachs, Morgan Stanley, RBC Capital Markets, Merrill Lynch, J.P. Morgan, and Citigroup Global Markets Inc., among others, each agreed to pay $500,000 to resolve public administrative and cease-and-desist proceedings initiated by the SEC for alleged violations of an antifraud provision of the federal securities laws, in connection with their role in underwriting certain municipal securities offerings.

Now, with the real possibility of criminal charges being brought against the officials who manipulate the books, there can be no doubt that the municipal bond market is on notice.  At a press conference on April 14, U.S. Attorney for the Southern District of New York Preet Bharara warned that his office will be “looking at these things more” than in the past, making it likely that we will see more indictments.

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