SEC probes Wachovia

The Securities and Exchange Commission enforcement division is expected to recommend to the Commission that it file civil proceedings against Wachovia for "anti-competitive" practices in the bidding for the investment of proceeds from tax exempt bonds issued by municipalities. But possibly in these instances, the SEC has managed to exceed its jurisdiction. It must be remembered that the SEC does not have jurisdiction over contracts. As a matter of fact, there is no federal jurisdiction over civil contracts.

 

From the SEC's own web site: "The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."

 

Look at the transaction the SEC is attempting to control. The municipalities solicited Wachovia and at least two other firms to enter into an agreement with the municipality to guarantee a rate of return on the municipality's investment of fund borrowed at tax exempt rates. The terms of the contract were prepared by the municipality pursuant to federal regulations. The fair market value of the contract was determined pursuant to those regulations.

 

So now we have a two party contract that the SEC is attempting to state falls under their jurisdiction. But that's not all.

 

The SEC is investigating because there may have been some bidding irregularities, specifically some sort of collusion. Assume the SEC is right and there was collusion. So what. Was the investor, the entity the SEC is to protect, harmed? There has not been such an allegation made in any investigation to date. And there is a reason.

 

Under federal regulations, the municipality that invests bond proceeds is limited to the amount of earnings it is allowed to keep. The balance must be sent to the IRS. That is why there has never been an allegation that the municipality was harmed. In all likelihood, even if there were collusion, did that event harm the municipality.

 

Now I'm sure that the SEC can overcome the problem of extending its jurisdiction to private contracts. All they have to do is find a friendly judge, in an ex parte proceeding, to say it is an investment contract. Of course that judge will find that a private two party contract was really "...an investment in a common enterprise with an expectation of profits to be generated through the efforts of others...." [HINT: To the SEC, try the Third Circuit]

 

But where the SEC will fail, is not stating what the market value of the investment contract should have been, but for the alleged collusion, and how that difference in market value really hurt the investor.

 

Enough for today. Sorry it has been such a long time between posts. I will do better in the future.

 

Stay tuned...lots more to come.