SEC levies $400,000 fine for Christie administration misuse of PA funds

• The SEC spent two years investigating whether the Port Authority misled investors by selling $2.3 billion worth of bonds without warning buyers that the road repair projects might be legally questionable.
• The settlement exposed private meetings and communications in which unnamed Christie allies planned how to fund road repairs by diverting almost $2 billion from a project to dig a trans-Hudson rail tunnel.
• The settlement also detailed how Christie’s allies planned how to overcome the legally questionable decision to label the Pulaski Skyway and other roads as “access roads to the Lincoln Tunnel” — and to then push that decision past the Port Authority’s board of commissioners. The scheme was first uncovered by The Record in March 2014.
• The SEC settlement detailed how, in the fall of 2010, as Christie’s allies tried to push the Port Authority to pay for the repairs to the roads, a senior staff lawyer warned that the agency was not authorized to do so.

Months before Gov. Chris Christie cited cost overruns as the reason he canceled a Hudson River tunnel project, his allies were scheming how to divert nearly $2 billion – much of it raised from travelers in the region --  to repair New Jersey roads, a government probe has found.

The Securities and Exchange Commission announced Tuesday a $400,000 settlement of its probe into why the Port Authority of New York and New Jersey spent $1.8 billion to repair New Jersey roads such as the Pulaski Skyway. That money had originally been set aside for the tunnel project.

In securing a rare admission of wrongdoing as well as its second-largest penalty against a municipal agency, the regulator delivered a sharp blow to Christie and his allies at the Port Authority and at the state Department of Transportation who directed the spending during Christie's first term.

The settlement exposed private meetings and communications in which unnamed Christie allies planned how to fund road repairs by diverting almost $2 billion from a project to dig a trans-Hudson rail tunnel.

The discussions took place several months before Christie officially canceled the project, known as Access to the Region’s Core, or ARC.

The settlement also detailed how Christie’s allies planned to overcome the legally questionable decision to label the Pulaski Skyway and other roads as “access roads to the Lincoln Tunnel” — and to then push that decision past the Port Authority’s board of commissioners. The scheme was first uncovered by The Record in March 2014.

At the time Christie canceled ARC, in October 2010, he said he was doing so over mounting fears of cost overruns.

“He wasn’t worried about cost overruns,” said Assemblyman John Wisniewski, who chairs New Jersey’s Assembly Transportation and Independent Authorities Committee and who is running for governor this year. “He was worried about how he was going to fund these other projects, and that was why he canceled the ARC tunnel.”

Editorial: SEC hits the Port Authority

Archive: Christie's toll-money shuffle: Port Authority funds paying for repairs to state roads

Archive: The Record: Shuffling tolls

Archive: Lesniak calls for probe into Christie's use of Port Authority funds for road repairs

During his administration, Christie has relied on tolls, not tax increases, to prop up transportation spending in New Jersey. Tolls and fares — what Christie has referred to as “user fees” — have been raised on the New Jersey Turnpike, Garden State Parkway, Hudson River crossings and NJ Transit buses and trains during his administration to fund projects throughout the state, even if they have little connection to the roads where the money comes from.

When funding for road projects ran dry last year, Christie signed a bill raising the gas tax by 23 cents to get construction crews working again.

Two-year investigation

The SEC spent two years investigating whether the Port Authority misled investors by selling $2.3 billion worth of bonds without warning buyers that the road repair projects might be legally questionable.

A criminal investigation by the Manhattan District Attorney's Office stalled last year. A spokesman for the DA declined to comment.

Christie’s office didn’t respond to requests for comment on Tuesday, the day the governor delivered his seventh state-of-the-state speech.

The Port Authority is legally bound to only repair roads associated with certain facilities.

The SEC settlement detailed how, in the fall of 2010, as Christie’s allies tried to push the Port Authority to pay for the repairs to the roads, a senior staff lawyer warned that the agency was not authorized to do so.

Nevertheless, in January 2011 Christie announced a five-year transportation plan that included the Port Authority spending $1.8 billon to repair the Pulaski Skyway and three other New Jersey roads.

Initially, the spending was rationalized because the roads were seen as providing access to the Holland Tunnel, a Port Authority facility.

But after Port Authority lawyers indicated that the agency was not authorized to fund repairs to approach roads to that tunnel, they were asked to find a different way of rationalizing the expenditure.

Soon, lawyers focused on the Lincoln Tunnel, miles to the north.

In a March 2011 memo, cited in the settlement, agency lawyers who had recently returned from a meeting with the Christie administration wrote that the Port Authority’s engineering department should conduct a traffic study to bolster the claim that the Pulaski Skyway, the Wittpenn Bridge, Route 139 and Portway New Road provide access to the Lincoln Tunnel.

“The study will conclude that these Projects … constitute approaches to the Lincoln Tunnel,” the memo added.

The following day, the Port Authority’s board approved funding road repairs under a “consent calendar” process in which a raft of resolutions is approved en masse without debate.

In what looks to have been a political trade-off, board members used the same vote to approve spending on the World Trade Center site, which was seen as important to New York Gov. Andrew Cuomo.

The road funding allowed Christie to embark upon major repairs in New Jersey without raiding the state's Transportation Trust Fund or raising its low gasoline tax.

The SEC quoted from internal memos expressing concerns about the spending, including one in which a Port Authority lawyer warned: “There is no clear path to legislative authority to undertake such projects.” Another memo warned of “the risk of a successful challenge by the bondholders and investors” in connection with the funding of the road repairs.

None of those concerns reached bond holders.

Scandals forced review of Port Authority procedures

In addition to the fine, the Port Authority agreed to retain an independent consultant to conduct a review of the agency’s policies and procedures. Since the road spending measure was passed and in the wake of several other scandals, the agency has made its board voting process more transparent and hired a new general counsel.

Although the SEC says that $116 million of bondholder money was used to pay for road repairs, the Port Authority says that money was subsequently reimbursed and that “the Port Authority did not ultimately use bond proceeds to fund the roadway projects.”

Andrew M. Calamari, director of the SEC’s New York regional office, said in a statement: “The Port Authority represented to investors that it was authorized to issue bonds while not disclosing significant known risks that its actions were not legally permitted.”

“Municipal bond issuers must ensure that their disclosures are complete and accurate so that investors can make fully informed decisions about whether to invest,” Calamari added.

Port Authority chairman John Degnan challenged the SEC’s statements.

“The Port Authority did not agree that it admitted wrongdoing,” Degnan said.

The chairman, who was appointed by Christie years after the road repair funding was approved, added that two outside law firms subsequently hired by the Port Authority rendered opinions that the legal doubts about the spending were “inaccurate.”

Degnan also pointed to the small nature of the settlement as an indication of the lack of seriousness with which the regulator had treated the episode.

Late Tuesday, the Port Authority sent a letter to the SEC disputing several assertions in the regulator’s statements, including a statement that the SEC’s investigation is continuing.

Most SEC settlements conclude with the party under investigation neither admitting nor denying wrongdoing. But in this case, the SEC drew attention to the fact that the Port Authority is the first municipal issuer to admit wrongdoing in an enforcement action.

Peter Henning, a former senior attorney in the enforcement division of the SEC, said the regulator saves an admission of wrongdoing “for its more egregious cases where it believes it has a strong case and enough evidence that it can essentially force the other side into this type of admission.”

Henning, a professor at Wayne State University, said it is likely that the SEC, which fined some banks billions of dollars in the wake of the global financial crisis, limited its penalty against the Port Authority to avoid being seen as taking toll-payer money and giving it to the federal government.

“With a private company, [the SEC] might well have demanded a lot more money,” Henning said. “But here the SEC is cognizant it doesn’t want to pass this burden on to the citizens of New Jersey.”

Jeffrey Manns, a professor of securities law at George Washington University, said: “The fact [the SEC] invested a significant amount of time and energy in investigating the allegations, that there’s an admission of wrongdoing and that there are very detailed remedial steps that the Port Authority must take tells you there is more to this story than merely a $400,000 slap on the wrist.”

More on Port Authority, Pulaski Skyway

New bus terminal part of $30B plan OK'd by Port Authority

Doc ument lifts lid on $30B Port Authority plan

Video: Port Authority meets on capital budget​

Archive: The Record cited in call for an SEC investigation of Port Authority

Archive: As U.S. attorney continues GWB probe, SEC looks into Port Authority spending

Archive: Port Authority acknowledges SEC investigation

Archive: Port Authority road-funds probe intensifies

Archive: Port Authority has $1.75M tab for lawyers in probe of Pulaski Skyway funding

Archive: Port Authority has $1.75M tab for lawyers in probe of Pulaski Skyway funding

Archive: Documents: SEC, Port Authority discussing road-funds probe resolution

Archive: Road-repair probe yields little; charges unlikely over Port Authority's use of $1.8B