The federal Securities and Exchange Commission is investigating possible fraud by the Florida State Board of Administration, the agency that manages $132 billion in public investments for hundreds of local governments and 1 million current and future retirees.
The federal investigation centers on whether the state and three Wall Street giants misled the public about the risk and liquidity of some of the SBA's investments.
The three firms that sold the troubled securities to the state are JPMorgan Chase, Credit Suisse and the now-defunct Lehman Brothers.
The SBA acknowledged it was part of an SEC preliminary inquiry last year but did not make public that the federal agency had elevated it to a formal fraud investigation, with a subpoena issued for SBA documents and testimony requested from some of the agency's top managers.
The SEC issued an order directing a formal investigation July 31, 2008, but the SBA did not make it public. The information was included in documents the St. Petersburg Times received Thursday in response to a public records request of the SBA.
The documents indicate the regulators want to know if the state investment agency and the three Wall Street firms misled the public about the risky nature of securities that plummeted in value and led to the implosion of an SBA-managed local government pool in late 2007.
Hundreds of cities, counties and school districts use the local pool as a checking account to pay bills and payrolls. They began yanking billions from the SBA after revelations that the agency was holding shaky securities tied to the subprime market.
The federal investigation order says that the SBA and the three firms "may have been or may be'' involved in a scheme to defraud by making false statements about the risk and liquidity of investments purchased by the local pool and other SBA-managed funds.
In addition to the local pool, soured investments ended up in Florida's retirement fund, the state's hurricane catastrophe fund and two other SBA-managed accounts.
Jack Kiefner, a St. Petersburg securities lawyer who formerly worked for the SEC, said Thursday's disclosures show that the investigation has gone "beyond a mere informal inquiry'' and is very unusual.
"I would say this is very rare'' for a state agency to be a possible target of an SEC fraud investigation, Kiefner said.
SBA spokesman Dennis MacKee said the agency made the investigation public as early as March 2008 but did not tell even the agency's three trustees — Gov. Charlie Crist, Chief Financial Officer Alex Sink and Attorney General Bill McCollum — about the formal SEC order of investigation.
"As the SBA had agreed to hold the order confidential, the order was not provided to the trustees at that time,'' MacKee said.
Spokesmen for the trustees said they were briefed and kept up to date on the investigation.
Kiefner, the former SEC attorney, said that although confidential under SEC rules, the state could have — and should have — made the formal investigation public.
A publicly traded company that was the subject of a formal securities probe likely would have disclosed it in federal filings with the SEC, he said.
"The standard applicable is whether or not the allegations or the subject matter would be material to the company shareholders or perspective shareholders,'' Kiefner said.
"If a public company would disclose it, what about the disclosure obligation of the state of Florida to municipalities and state employees? Would the standard be any less or greater or the same? If it's the same or greater, it should be disclosed, and I can't imagine that the standard could be any less.''
Some local officials with money invested in the SBA felt they were kept in the dark.
"I think it's something the investors should know, especially when they're still asking us to put money in the fund,'' said Pat Frank, clerk of the circuit court in Hillsborough County.
Hillsborough, one of the SBA's largest investors, has about $214 million invested in the agency and faces a possible loss of $14.6 million because of bad investments.
MaryEllen Elia, Hillsborough's superintendent of schools, said local governments were aware of the investigation.
"We knew there was ongoing review of everything that occurred,'' said Elia, who chairs the SBA's local government advisory council. "I can't say I knew that'' there was a formal order of investigation, but "it was clear it had not been closed.''
Marcia Dedert, Port St. Lucie's finance director, was heartened when the Times told her Thursday about the formal fraud investigation.
Port St. Lucie had $291 million invested in the pool and deposited another $134.3 million after Dedert was assured by SBA officials that everything was fine. The next day, the SBA froze the pool and Port St. Lucie's money.
At the time, the city asked the FBI to investigate what it called an outright deception, but nothing ever happened.
"I feel like the citizens of this community were misled when I called them (the SBA) and they said everything was wonderful,'' Dedert said Thursday. "I think it's great they're investigating it.''
The documents released Thursday say the SEC launched the formal probe in July 2008 and requested testimony in October 2008 from four SBA managers: Michael Lombardi, Rob Smith, Carmen Fisher and Kevin SigRist. The SEC issued a subpoena to the SBA for documents in April 2009.
MacKee, the SBA spokesman, noted that the agency released information about the SEC's investigation last year. In May 2008, The Bond Buyer, a publication about public finance, revealed the SEC inquiry and noted that it had been described as "a public records request'' on the SBA's Web site.
Spokesmen for JPMorgan, Credit Suisse and the Lehman bankruptcy trustee declined to comment Thursday.
MacKee said the SBA does not know exactly what the SEC is looking into. "Inquiries made to the SEC asking the question are not given a response,'' he said. "Further, the SEC will not confirm what the status of their investigation is.''