Who has not heard of the Bridgegate scandal? The George Washington Bridge spanning the Hudson River between New Jersey and New York City is the busiest motor vehicle bridge in the world. Two of three toll lanes for a street entrance from Fort Lee, NJ to the George Washington Bridge were closed for five days in September 2013. This resulted in huge backups in Fort Lee. As one of the individuals convicted in the incident emailed, “Time for some traffic problems in Fort Lee.”
The lanes were closed by the Port Authority of New York and New Jersey. The Port Authority is a two-state entity operating under a Congressionally-approved compact. There were allegations that the closures were politically motivated as a way for the Christie Administration to punish the Mayor of Fort Lee for not supporting Governor Chris Christie’s reelection campaign in 2013.
The controversy resulted in multiple investigations by federal and state officials and in the federal indictment and conviction of two officials and a plea bargain by a third official. The scandal was also raised in the course of Gov. Christie’s presidential campaign in 2016. The scandal highlighted the problems which can arise when political concerns and public safety concerns collide.
There has been another collision in the Port Authority’s world, this time between politics and municipal bond disclosure. The Port Authority is one of the largest issuers of municipal bonds in the country. The proceeds of the bonds are used to finance the construction of the Port Authority’s facilities which include multiple major tunnels, bridges and airports, plus a bus terminal and the World Trade Center complex. On January 10, 2017 (Release No. 10278), the Securities and Exchange Commission imposed a cease and desist order against the Port Authority and fined the Port Authority $400,000 for disclosure violations in the Port Authority’s bond issues.
On the political side, the Christie Administration wanted to apply $1.8 billion of Port Authority bond proceeds to fund various roadway projects in New Jersey. On the legal side, in-house lawyers at the Port Authority struggled with the issue of whether the desired roadway projects constituted projects that the Port Authority could finance under its enabling legislation.
The SEC Order describes in detail the back-and-forth handwringing by the Port Authority lawyers in 2010 and 2011 on the legal question. The lawyers specifically concluded at various points in time that the Port Authority’s enabling legislation did not permit it to spend funds on the roadway projects. This conclusion was shared with a senior staff member of the Governor’s office.
On March 24, 2011, the Governor announced a proposed fiscal year 2012 transportation capital program which included funding for the roadway projects coming from the Port Authority. Four days later, the Port Authority lawyers drafted a memorandum which stated that “it can be argued” that the Port Authority could fund the roadway projects. On the next day, the Port Authority’s Board of Commissioners approved the funding of the roadway projects at a public meeting with no discussion of the issue (it was part of the consent agenda). Apparently the members of the Board were unaware of the legal concerns.
The effect of the intersection of politics and the law in the previous paragraph is obvious.
The lawyers were clearly squeamish. Included in their March 28 memorandum is the following CYA language:
… it is important to note that this statutory construction is not without doubt and may raise questions in the minds of some. The analysis veers away from the traditional model used by the Port Authority in determining whether it can undertake a project pursuant to existing Port Authority bi-state legislation. The looser the statutory construction means the greater the risk of a successful challenge by the bondholders and investors.
My-oh-my. The SEC regulators must have smiled from ear to ear when they read that.
In the Port Authority’s bond issues done in 2012, 2013 and 2014, there was no mention of the concerns related to the legal authority for the roadway projects. The Official Statements stated that the Port Authority issued bonds “only for purposes for which the Port Authority is authorized by law to issue bonds.”
The SEC found that the Port Authority knew, or should have known, that undisclosed legal risks surrounding the roadway projects were material to potential investors in making investment decisions, and the Port Authority was negligent for failing to disclose those risks, thereby resulting in violations of Sections 17(a)(2) and (3) of the Securities Act of 1933.
The SEC Order sets forth remedial steps the Port Authority has agreed to take, including hiring a new general counsel, retaining and using outside bond counsel on its bond issues, and requiring the Port Authority’s legal department to certify to the Board of Commissioners that any proposed expenditure of Port Authority funds is legally authorized. In addition, the Port Authority has agreed to retain an independent consultant, not unacceptable to the SEC, to conduct a review of the Port Authority’s policies and procedures related to disclosures in its bond issues. The independent consultant is to issue a report and the Port Authority must adopt substantially all of the recommendations in the report.
What are the lessons to be learned from this collision of politics and the law?
When dealing with municipal entities, there is often some infusion of politics in whatever is being done. That is not inherently a bad thing, and in some cases it raises legitimate issues that should be considered. But at some point, if the political force is completely ignoring other vitally important considerations, the influence of the politics on the matter in question needs to be toned down or cut off. In the case of the Bridgegate scandal, it was unacceptable to allow political considerations to trump the health and safety of the men, women and children stuck on the entrance ramp to the bridge. In the roadway funding question, the lawyers at some point have to finish their analysis, draw the line and say “thus far and no further.” This is easier said than done, but there are times when it must be done, whatever the consequences.
On the question of what needs to be disclosed, the following simple saw is often the best advice: if you are spending significant time worrying about whether something needs to be disclosed, then just disclose it and move on to the next thing. If the thing in question is so fundamental that disclosing it will kill the deal, then you need to go back and deal with the thing itself before going forward with the deal.
Hopefully the Port Authority of New York and New Jersey is over its troubles and has better days ahead, because we all enjoy visiting the Big Apple, whether by car, bus, train or jet.
A version of this article originally ran in The Bond Buyer on January 12, 2017.