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[Suresh]

New York Times: Red Flags That Muni Investors Can’t See
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Full disclosure, that bedrock of fair securities markets, is the heart of the problem facing municipal investors. Indeed, municipal issuers often fail to file the most basic reports outlining their operating results or material changes in their financial conditions.
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One out of two issuers is more than a year late in its filings, according to DPC Data, a company in Fort Lee, N.J., that collects information on municipal securities transactions. One out of four is chronically delinquent, by three years or more.
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For the study, Peter J. Schmitt, DPC’s chief executive, examined trades that involved issuers that had recently filed so-called distress notices, indicating that they were experiencing financial problems.

Mr. Schmitt found that an alarming number of these beleaguered issuers’ securities were purchased by individual investors at nondistressed prices — 100 cents on the dollar (known as par value) or higher. This indicates that brokerage firms executing the trades may not have been aware of the issuers’ troubles or failed to give investors full disclosure about them, Mr. Schmitt said.
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Although the economy was tanking, DPC data found that almost 28,000 trades took place in securities that issued a distress notice at some time during the year. Some 9,643 of those trades were sales to customers, both institutions and individuals; more than half of them — 5,798 — were bought at par value or higher.

Mr. Schmitt dug deeper, analyzing how many customer purchases were made after a distress notice was filed by the issuer. He found 1,782 such trades, of which 667 were sold at par or more.

Obviously, when evidence emerges that a debt issuer is under stress, one would expect the price of its bonds to fall. And yet hundreds of trades of exactly this kind of debt were priced at par or higher, which Mr. Schmitt finds troubling.
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Other interesting details emerge in his study. For example, October was the biggest month for sales of distressed bonds to customers at par or premium prices. And 41 percent of the 667 purchases in distressed bonds appear to have been made by small investors, indicated by the size of each trade — $50,000 or less.

The issuers behind almost half of the 667 issues tracked by Mr. Schmitt had not filed financial statements in either 2008 or 2007, he said.
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Suresh

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