SEC Files Settled Fraud Action against the State of Illinois for Misleading Pension Disclosures

In the Matter of State of Illinois, Admin. Proc. File No. 3-15237.  On March 11, 2013, the SEC announced it issued a settled cease-and-desist order against the State of Illinois.  This is the second time the SEC has charged a state with violating the federal securities laws in their public pension disclosures.  The SEC charged the State of New Jersey in 2010.   Without admitting or denying the allegations, Illinois consented to the SEC’s order.  The order finds that Illinois established a 50-year pension contribution schedule in the Illinois Pension Funding Act that was enacted in 1994.  The schedule, however, did not adequately fund both the cost of benefits accrued in a current year and the payment to amortize the plans’ unfunded actuarial liability.  The plan underfunded the state’s pension obligations and deferred a significant amount of the pension contributions into the future years.  As a result, the pension system had difficulty meeting its various financial obligations.  The fund enacted changes in 2005, but the state mislead investors about the import of those changes.  Although the state told investors about pension holidays and changes, it did not disclose the impact of those changes and Illinois’ ability to meet its pension obligations.   In 2009, the state made significant efforts to correct the problems with the pension funds.  It improved disclosures, hired counsel, instituted written policies and procedures, and implemented disclosure controls and training programs.  The SEC acknowledged the state’s efforts and its cooperation when agreeing to the settlement.  The SEC order requires Illinois to cease and desist from committing or causing any violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act.

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