WASHINGTON -- Everyone deserves his day in court.

And that principle certainly should apply to two extraordinary municipal bond cases that were in the spotlight last week.

One was the Securities and Exchange Commission's shutdown of FSG Financial Services Inc. because the Beverly Hills, Calif., securities firm allegedly sold what may be over $1 million of nonexistent municipal bonds to hundreds of investors.

The other was the unprecedented action by a U.S. district court in agreeing to hear the Riverside County., Calif., Housing Authority's dispute with the Treasury and Internal Revenue Services over the questionable $17.5 million Whitewater Garden bond issue while temporarily blocking the government agencies from either collecting arbitrage or revoking the tax-exempt status of the bonds until a trial takes place.

If it is proven that FSG sold nonexistent bonds, the firm and its officers deserve the worst. Such a scam could only poison investor interest in the municipal market, injure the reputations of legitimate broker-dealers, and hurt the ability of states and localities to issue debt.

While it almost goes without saying that the firm must be allowed to present its side, the most noteworthy thing is the way the agency is going after them.

For the first time, the SEC is using a tough measure signed into law last October that allows it to level stiff penalties against securities law violators that can add up to as much as three times the amount lost by investors.

All too often the SEC has merely slapped violators on the wrists or just required them to disgorge their profits.

If the decision to use the new law in this case signals that the SEC is going to be more aggressive in pursuing securities fraud, it is a move that will help protect the entire municipal industry by sending a clear chilling message to those who contemplate cheating investors.

The decision by Judge Consuelo B. Marshall of the U.S. District Court for the Central District of California to hear Riverside's arguments is also a good development -- but one with a disturbing twist.

Certainly, the Riverside authority deserves a hearing and should be allowed to present its arguments -- even though the bond deal appeared to be abusive and the authority, as the issuer, should be held as responsible as any other participant in the deal.

The bad side to the decision was the requirement that before a trial can be held the authority must post a $2.25 million bond with the court, which represents the amount of arbitrage the government contends should be rebated from the deal.

That is disturbing because the authority should not have to put up money it does not have in order to get its day in court.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.