Feds accuse New Jersey of fraud (state bonds)

Federal regulators accused the State of New Jersey of securities fraud on Wednesday for claiming it was properly funding public workers’ pensions when it was not.

The Securities and Exchange Commission said the action was its first ever against a state, and only its second against any government over the handling of a public pension fund. The city of San Diego was the first.

The S.E.C. settled its civil complaint with New Jersey by issuing a cease-and-desist order, which the state accepted without admitting or denying the findings.

The agency did not impose a financial penalty. The S.E.C.’s powers of enforcement against the states are tightly limited by states’-rights concerns and constitutional law, and it has standing to get involved only when there is a clear-cut case of fraud.

Nor did the S.E.C.’s order name the bond underwriters whose job it was to vouch for the state’s financial statements. That raised the possibility that investors might decide to file suit.

The action could also put pressure on other states and cities that have used various accounting maneuvers to portray their pension funds as healthier than they currently are. Actuaries have been raising questions, for example, about the plans Illinois has laid out for strengthening its pension funds.

The S.E.C. said in its cease-and-desist order that investors bought more than $26 billion worth of New Jersey’s bonds, without understanding the severity of the state’s financial troubles.

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