state of New Jersey–the latest strange SEC decision

New Jersey is an odd state.  On the one hand, this small but densely populated region contains a famous research university, Princeton.  It generates much of the pharmaceutical research done in the US.  It contains bedroom communities for New York City and Philadelphia, as well as miles and miles of rolling beaches, and the hills, lakes and horse farms in the western part of the state.

On the other hand, its reputation in the minds of many Americans is determined by the HBO series The Sopranos, about an organized crime family operating in NJ; the reality show Jersey Shore, whose “stars” are, ironically, New Yorkers; and a short–but heavily used–stretch of the New Jersey Turnpike that seemingly threads its way through every oil refinery, chemical plant and natural gas storage area in the Northeast. Local politicians have also done their bit to define the state’s character, as they have sued for the right to remain in office, or to run for reelection, while in their jail cells.

New Jersey has been in the financial news recently for another signal achievement–it’s the first state ever cited by the SEC for securities fraud (San Diego, CA has the dubious distinction of being the first government entity to be the subject of an SEC securities fraud action).  The charges, which New Jersey settled in an administrative proceeding this week, are basically that while Jim McGreevey and Jon Corzine were governors, the state continually deceived potential investors in its municipal bonds.  In bond offering documents and in other official state records, New Jersey either misstated or failed to disclose the increasing underfunding of state workers’ pension plans–caused in part by the fact that the state was “balancing” the budget by no longer making contributions to them.

You might think that this is the strange part.  It isn’t.  The really strange part is that in the cease-and-desist order linked in the paragraph above, no individuals are cited for this misconduct–not the governors who knew what was going on, nor the state treasurers who prepared the fraudulent financials, nor the investment bankers whose due diligence was non-existent.  In this regard, Mr. Corzine’s name in particular jumps out to me, not necessarily because his actions were any worse than the others’ but because his long career at Goldman Sachs, including serving as its CEO, make it very difficult to believe he wasn’t completely aware of the relevant securities laws and of the gravity of what New Jersey was doing.

The rationale for the SEC’s inaction–cooperation from New Jersey, which has promised to mend its ways.

The fact that this is not a court proceeding means there’s no judge to evaluate the SEC’s decision.  But it seems to me that this enforcement action–particularly in an apparently simple and straightforward case–reinforces critics (including judges, in court cases) who say that the SEC is a relatively toothless regulator, more interested in fast settlements than in adequate ones.

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