by T. GormanPosted on Posted in SECActions

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.

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by T. GormanPosted on Posted in SECActions

The cover-up is virtually always worse than the underlying conduct. History is replete with instances where improper or even wrongful conduct was severely aggravated by an effort to conceal the conduct. That is precisely the case of former investment adviser – broker-dealer CEO who sought to conceal referral fees paid to attorney Peter Hershman. In the Matter of John W. Rafal, Adm. Proc. File No. 3-17760 (January 9, 2017); In the Matter of Peter Hershman, Esq., Adm. Proc. File No. 3-17761 (January 9, 2017).

Mr. Rafal was the CEO of dual registered Essex Financial Services, Inc. which held majority ownership of Essex Savings Bank. Mr. Rafal had a partial ownership interest in Essex Financial. Mr. Hershman was a Connecticut attorney who specialized in business, estate planning and tax law.

In 2010 Mr. Hershman began discussing the referral of a wealthy widow, one of his legal clients, to Mr. Rafal and Essex Financial. The client had combined assets of over $100 million. By the next year the two men reached an agreement under which attorney Hershman would be paid an annual fee of $50,000 quarterly from the advisory fees for referring the client. Mr. Hershman was to become a registered investment adviser.

The client subsequently retained Essex Financial to manage a portion of her funds. While Mr. Hershman failed to become an investment adviser he did stay in touch with the client and Mr. Rafal. He also continued to try and refer clients to the firm.

In mid-July 2012 the two men agreed that Mr. Hershman would bill Essex using statements representing that the payments were for legal fees. Eventually the fees were paid. Internal complaints at Essex concerning the undisclosed solicitation payments, however, resulted in a demand by the firm that they be repaid the next year. Although part of the fees was repaid to the firm Mr. Rafal made other arrangements to pay the fees. The fee arrangement was never disclosed to the clients.

In 2013 Mr. Rafal believed that rumors were circulating concerning him and the payment of illegal fees. He t sent a number of emails to firm clients and others falsely stating that the SEC had investigated the matter and issued a “no action” letter. When senior firm officials discovered the emails they ordered them retracted. Mr. Rafal complied.

Subsequently, Mr. Rafal testified in an investigation conducted by the Commission staff. During his testimony he stated that the fees had been repaid. He concealed from the staff the fact that he had made arrangements to pay the fees from accounts he controlled.

The Order as to Mr. Rafal alleges violations of Advisers Act Sections 206(1), 206(2) and 206(4). To resolve the case Mr. Rafal admitted to the facts in the Order and consented to the entry of a cease and desist order based on the Sections cited in the Order. He is also denied the privilege of appearing or practicing before the Commission as an attorney and barred from the securities business and from participating in any penny stock offering. Mr. Rafal will pay disgorgement of $275,000, prejudgment interest and a penalty of $275,000. The U.S. Attorney for the district of Massachusetts announced criminal charges against Mr. Rafal for obstructing the proceeding of a federal agency.

The Order as to Mr. Hershman alleges violations of Advisers Act Section 206(1) and 206(4). Respondent Hershman resolved the action by consenting to the entry of a cease and desist order, without admitting or denying the facts, based on the Sections cited in the Order. He is also barred from the securities business and from participating in any penny stock offering. In addition, Mr. Hershman will pay disgorgement of $49,760, prejudgment interest and a penalty of $37,500. See also In the Matter of Essex Financial Services, Inc., Adm. Proc. File No. 3-17762 (proceeding against the firm alleging violations of Advisers Act Section 206(4); resolved with a consent to a cease and desist order and the payment of $170,000 in disgorgement and prejudgment interest).

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