NY-NJ Port Authority Admits Violating Federal Securities Laws
The Port Authority of New York and New Jersey is a significant participant in the capital markets with about $20 billion in debt outstanding. Tracing its history to 1921 when the two states entered into an interstate compact approved by Congress, it is the steward of virtually all major transportation facilities in the Port District which includes significant portions of each state. Those facilities include two tunnels, four bridges, five airports, a bus terminal and the World Trade Center complex. Nevertheless, its authority is limited. In issuing a series of bonds in 2012, 2013 and 2014 the Port Authority failed, however, to tell investors that it may not have had the necessary legal authority. In the Matter of The Port Authority of New York and New Jersey, Adm. Proc. File No. 3-17763 (January 10, 2017).
The Port Authority has responsibility for creating and maintaining significant portion of the New York and New Jersey transportation infrastructure. To fund those projects the Port Authority relies in part on the capital markets for the issuance of bonds and other financing obligations.
In January 2011 the Governor of the State of New Jersey announced a five year transportation capital plan. It included $1.8 billion in projects the Governor asked the Port Authority to undertake in connection with the New Jersey Department of Transportation. The projects included critically important transportation projects in the Port District that linked the Holland Tunnel and the Port. It included certain road and bridge projects.
Port Authority attorneys reviewed the projects and concluded on multiple occasions that there was a risk of a successful challenge by the bondholders and investors to its legal authority in connection with the roadway projects. Indeed, on multiple occasions the Port Authority lawyers cautioned that project which are outside the scope of its authority cannot be undertaken. In one draft memorandum prepared about the project the attorneys noted that there “is no clear path to legislative authority to undertake such projects.” While another memorandum prepared by the legal department suggested a way to link the projects to certain legislative authority, ultimately the department concluded that “this statutory construction is not without doubt” – the analysis “veers away from the traditional model used by the Port Authority . . . in determining if it has authority to proceed.
On March 29, 2011 the Port Authority’s Board of Commissioners met and approved the projects. No disclosure to the Board of Commissioners occurred regarding the potential legal issues. The Official Statements for an aggregate of $2.3 billion in bonds issued in June 2012, December 2012, November 2013 and June 2014 all stated that the bonds were only for purposes for which the Port Authority is authorized by law to issue bonds.” The Order alleges violations of Securities Act Sections 17(a)(2) and (3).
In resolving the proceeding the Port Authority undertook a number of remedial acts and undertakings, including the retention of an independent consultant. The Port Authority also consented to the entry of a cease and desist order based on the Sections cited in the Order. In doing so, the Port Authority admitted violating the federal securities laws – a first in a municipal bond case. The Port Authority will also pay a penalty of $400,000.