Controversial bond sales, FINRA fines impact muni market in 2024

Lawsuits surrounding everything from unethical sponsorships to the sale of refunding bonds swept across the public finance markets in 2024, creating a tense dynamic between municipalities and regulators. Here are some of the top cases from the last few months to keep track of.

Travis County District Court Judge Karin Crump ruled in December on a case involving a 2020 rule change implemented by Texas Comptroller Glenn Hegar’s office that affected how sales taxes were assigned during interstate online purchases. The change shifted the tax to the location of the buyer as opposed to the in-state location of the seller where the order is handled.

Crump found in favor of Coppell, Humble, DeSoto, Carrollton, Round Rock and Farmers Branch, the six cities that brought claims against the state, permanently stopping the enforcement of the controversial rule and saying current state law amply provides “a detailed statutory scheme for determining where a sale of taxable items is ‘consummated.'”

Read more: Texas judge mostly sides with cities in online sales tax rule challenge

In Oklahoma, county commissioners are hoping to reach a settlement with Oklahoma City officials in a June lawsuit following holdups in the construction of a bond-financed detention center on the outskirts of the region.

The prospect of a settlement grew after a letter penned by the Oklahoma Attorney General’s Office weighed in on the county’s position in the situation and stated that the significance of the prison project would yield an advantage over Oklahoma city.

“(The project) is so important that a court would likely grant immunity (from the city’s zoning regulations) to the county’s determination of the new county jail site despite substantial and even compelling local interests,” Deputy General Counsel Thomas Schneider wrote, citing his views and analysis of the controversy.

Commissioners explored the prospect of a public-private partnership in November seeking to gain ground amid stalling progress and rising costs, using proceeds from the arrangement to compound with $260 million of general obligation bonds approved in June 2022 for a new jail.

On a broader scale, anti-environmental, social, and governance regulations have put regulators into action in Oklahoma, Texas, Missouri and beyond. 

While Oklahoma officials have been fighting what appears to be an uphill battle to reinstate its Energy Discrimination Elimination Act of 2022, Texas regulators are defending its comparable 2021 law preventing governmental contracts with financial entities deemed to be “boycotting” the fossil fuel industry.

Read more: Judge strikes down Missouri anti-ESG investment rules

Below are insights into more high-profile cases that impacted the public finance space in 2024.

Houston mayor calls out city controller for soliciting sponsorships

Prior to the City of Houston’s Annual Investor Conference in October, Houston Mayor John Whitmire called out city Controller Chris Hollins for what he described as fielding sponsorship bids for the conference from municipal bond firms.

Whitmire alleged that bond underwriting firms reached out to him regarding sponsorships ranging from $10,000 to $100,000, as well as a tiered list of the perks each category would grant to the organizations who bought in.

“This is nothing but the appearance of pay-to-play in Houston, Texas, done with city resources, city employees, and it’s damaged Houston,” Whitmire told reporters at a city hall press conference.

Read more: Houston mayor blasts controller over investor conference sponsorships

The fallout from problematic bonds, Chicago Public Schools drama

When Chicago’s City Council met in early October, members were faced with the decision of whether or not to sell problematic refunding bonds as well as the recent departure of the city’s seven-member Chicago Public Schools board.

Later that month, despite postponing any action on the refinancing and numerous concerns from state officials, the council approved the plan to refinance $1.5 billion of the city’s debt. About $850 million of the general obligation bonds will be callable on Jan. 1, and the city plans to use a tender offer for about $500 million of bonds.

S&P Global Rating placed the GO bond rating at watch negative last month, but Chicago leaders are still proceeding along with the help of RBC Capital Markets, which priced the city for $806 million of bonds earlier this month. 

Read more: Chicago City Council to tackle controversial bonds, CPS drama

Oklahoma treasurer, constituents face lawsuit over alleged document mismanagement

In October, Oklahoma Treasurer Todd Russ, his office and his chief of staff and deputy treasurer, Jordan Harvey, were sued by Alabama-based FOIA Professional Services, LLC for allegedly withholding and possibly destroying documents pertaining to a controversial anti-ESG law.

The Energy Discrimination Elimination Act of 2022 prevents the formation of contracts worth $100,000 or more between state and local governments and companies identified by the Oklahoma Treasurer’s Officer to be “boycotting” the fossil fuel industry. The law received a permanent injunction in July preventing its enforcement.

In the lawsuit, FOIA Professional Services alleges that Russ’ office failed to fully comply with with requests for documents “related to or discuss divesting from or limiting contracts with financial institutions” and regarding “determinations of which financial institutions are or are not listed in a list of financial companies prepared by” the Office of the State Treasurer.

Read more: Oklahoma treasurer sued over documents tied to anti-ESG law

FINRA hits Merrill Lynch with $50,000 fine for muni violations

Leaders with the Financial Industry Regulatory Authority fined Merrill Lynch, a subsidiary of Bank of America, $50,000, part of a host of fines amounting to roughly $2 million, for errantly reporting 65,335 municipal securities transactions that it shouldn’t have.

“From September 2017 to February 2019, the firm reported 65,335 transactions in municipal securities that a third-party dealer executed and for which the firm acted only as custodian,” FINRA said. “The over-reporting occurred because the firm failed to code its systems to suppress the reporting for such transactions.”

Merrill neither confirmed nor denied FINRA’s ruling, instead deciding to comply with the fines as well as an added censure for violating MSRB Rules G-14 on customer transaction reporting and MSRB Rule G-27 on supervision.

Read more: FINRA fines Merrill Lynch $50,000 for muni violations out of $2 million total

Municipal bonds at the heart of lawsuits across the Southwest

Across Arizona, Oklahoma, Texas and Utah, municipal bonds have become directly or indirectly involved in several lawsuits surrounding defaults, bankruptcy, environmental concerns and regulations on fossil fuel dealings.

Municipal bond funds from Vanguard, AllianceBernstein, and Voyageur sued bond underwriter B.C. Ziegler, bond counsel Gust Rosenfeld and others in September over “fraudulent statements and omissions in offering documents” tied to roughly $284 million of revenue bonds issued in 2020 and 2021 by the Arizona Industrial Development Authority for non-profit Legacy Cares. The bonds were made up of mostly tax-exempt and unrated revenue bonds.

The suit was brought about by the Chapter 11 bankruptcy filing of Legacy Cares in May 2023.

Read more: Lawsuits in multiple Southwest states involve municipal bonds