"If you see something, say something." That's the message Reid Muoio and his little band of lawyers brought to the audience at the annual meeting of the Association of Public Treasurers of the United States and Canada. Muoio is the deputy chief for enforcement in the Structured and New Products Unit of the U.S. Securities and Exchange Commission. Treasurers of cities, counties, school districts, pension funds and other public bodies oversee the investment of huge amounts of public money. To do that work, they deal with brokers, financial advisers, banks and others and purchase a wide variety of investments — and sometimes things go wrong.
For example, in a case filed by the SEC, five school districts in Wisconsin participated in a program to create a trust to fund retiree benefits by investing in notes linked to the performance of synthetic collateralized debt obligations (CDOs). In three transactions, the districts put in $37.3 million of their own money and borrowed $162.7 million, for a total investment of $200 million. According to the charges filed against the broker by the SEC, the investments "steadily declined in value in 2007 and 2008 as the CDO portfolios suffered a series of downgrades." By 2010, the second and third investments were a complete loss, and the lender had seized all of the trust's assets. In addition to a complete loss of their investments, the districts suffered credit-rating downgrades, according to the SEC charges.
The SEC charged the brokerage firm, Stifel, Nicolaus & Co., and one of its senior executives with defrauding the school districts; that case is still in litigation. RBC Capital Markets was charged with misconduct and agreed pay $30.4 million to the school districts to settle the charges.
How much of this kind of thing is going on? As one of Muoio's colleagues put it, "In 2012 there are crazy products being sold that the regulatory market is not set up to track." The challenge the SEC lawyers face is that securities transactions of the type they're interested in are virtually invisible to those who are not parties to them.
When cases like the one involving the school districts in Wisconsin come to light, they might make a blip in the local media, but it's rarely news that lasts long or comes to national attention. That's why Muoio and his team are on the road talking to groups like the public treasurers. His message to them: If you have an interaction with someone that leaves you saying "this seems weird," give us a call. (His phone number is 202-551-4488, and you can email him at email@example.com.)
Muoio admits that "it might be a little unseemly for us to be down here begging for cases." But treasurers — some appointed, some elected, some civil service — are responsible for assuring the safety and liquidity of public funds while earning a reasonable return on investment. The last thing they and the taxpayers need is to see those investments vanish because nobody picked up a phone.