Usually when you see Securities and Exchange Commission charges it is against individuals or firms bilking individuals. That is why today’s round of SEC charges looks more than just interesting. Monday’s news out of the SEC shows that the SEC has now charged the State of Illinois with securities fraud for actions from the period of 2005 to 2009.

The fraud from Illinois was for misleading municipal bond investors about the state’s approach to funding its pension obligations. We figured this was a first, but it is a second. The SEC charged the state New Jersey in 2010 with violating federal securities laws in their public pension disclosures.

An SEC investigation revealed that the State of Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. The charge said, “Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition. The state also misled investors about the effect of changes to its statutory plan.”

The SEC also shows that Illinois has settled the charges and has implemented a number of remedial actions and issued corrective disclosures as far back as 2009.

As far as why this matters, let’s just call it a ratings agency issue. It was just in December of 2012 that Moody’s revised the State of Illinois’ rating outlook to negative from stable and showed that its general obligation rating was affirmed at “A2.” Then late in January of 2013 came word that S&P lowered the State of Illinois rating down one notch to “A-” ahead of a bond sale due to rising pension costs.

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