Invest1 publisher3 min readPublished
Former council solicitor alleges SEC violations in every Pittsburgh bond issuance
Former council solicitor Dan Friedson alleged Pittsburgh broke securities rules "with every bond issuance," according to a DA search warrant. If that damages the city's credibility, the cost would fall first on its next bond sale.
The Investor · Invest desk
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What happened
- The allegation appears in a warrant the Allegheny County District Attorney served on the city in March, as part of an inquiry into possible bid-rigging under the Gainey administration.
- In March, Mayor Corey O'Connor disclosed a budget shortfall he said could reach $40 million and blamed "a lot of false assumptions" by his predecessor's administration.
- Last year, Controller Rachael Heisler called Ed Gainey's final budget "not an honest document," and the council rejected it and rewrote the spending plan.
- Spokespeople for the SEC and the U.S. Attorney's Office in Pittsburgh declined to comment.
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Why it matters
- exposure Friedson's claim covers every issuance, so the exposure reaches each bond series sold on the disputed figures. Holders of older bonds are in scope along with buyers of the next one.
- constraint An SEC inquiry would likely take years and could not stop the city from borrowing. Pittsburgh can keep issuing bonds while the question hangs over every sale.
- contradiction Friedson told investigators he believed officials broke SEC law. Cox said a departure from accounting principles does not by itself break the law, so the warrant's accounting claims would need more support to become an enforcement case.
The warrant passes on Friedson's account as investigators recorded it, and the substance comes down to two revenue lines [4]. On property taxes, the affidavit says "The Real Estate Taxes were not accounting for the decline in revenues that were known to the City of Pittsburgh" [6]. On the levy charged to visiting athletes and performers, it says "The 'Jock Tax' was being included in budgeted revenues but the tax was not itemized and was being hidden for those that would review the City of Pittsburgh's finances" [7]. That tax, formally the Sports Facility Usage Fee, is a 3% surcharge [5].
The reporting does not put a dollar value on either line, or on how much debt Pittsburgh has outstanding. The only size anyone has put on the overstatement is the mayor's shortfall estimate [8], and that figure measures a budget. Friedson's allegation is that the same rosy figures went to investors, and that officials knew it [2].
This can go one of three ways. The allegation may stay a detail in a county case about contracts [3]. Or the SEC opens a civil inquiry. "It could give the SEC a basis to go after the city if they misstated the financial condition of the city and the revenue," said Chad Ostrosky, a Pittsburgh attorney who has practised securities law for 10 years [10]. The third possibility is that investors treat the warrant as a new claim of intent, the word "knowingly," added to a budget problem the council and the controller made public last year [2][9].
I think most of the cost falls on Pittsburgh's next borrowing. The city relies on bonds to pay for capital projects [18], so it will have to come back to buyers. Jeff Cox, a former SEC enforcement attorney now in private practice in Florida, described the risk the same way. "The immediate practical issue is credibility in the bond market," Cox said [12]. "Future bond offerings could be more difficult" [13]. For bonds already sold, I'd expect any effect to come through ratings. Asked about the prospect of findings against the city, Ostrosky said, "It's meaningful to investors and the future of any kind of bond grading" [11]. The view is wrong if a rating agency acts on the warrant before the city's next sale. In that case, holders of existing bonds pay first.
Councilwoman Erika Strassburger chairs the council's finance and law committee, and she said she wants the city to keep its ability to issue bonds [17]. "I intend to investigate whether the public release of this warrant and the contents within it will play any role in a future bond issuance or the ability to maintain our financial strength with regard to credit ratings," she said [17].
What to watch
- How Pittsburgh's next bond offering document presents real estate tax and jock tax revenue, and whether it discloses the warrant.
- Whether the Allegheny County DA's bid-rigging probe produces charges that cite the city's financial disclosures to investors.
- Whether the U.S. Attorney's Office in Pittsburgh, which declined to comment, opens its own inquiry.