SEC Charges City and its Underwriter With Fraud

SEC Charges City and its Underwriter With Fraud

 The City of Victorville California, Assistant City Manager Keith Metzler, deal underwriter and broker Newcomb & Dedios or KND and its principle Jeffrey Kinsell were named as defendants by the Commission in a suit alleging fraud in connection with the sale of municipal bonds. The city airport authority, Southern California Logistics Airport Authority, two executives at KND and an affiliate of the firm were also named as defendants. SEC v. City of Victorville, Case No. EDCV 13-776 (C.D. Cal. Filed April 29, 2013).

Over a two year period beginning in 2006 the Airport Authority, created to redevelop a 132 acre tract of land around a former Air Force base, offered and sold at least four tax increment financings. In each instance investors were provided with an Official Statement describing the terms and conditions of the offering. KND was the underwriter for each offering.

The tax increment bonds were secured by, and repaid from, increases in property tax revenues. Those increases were tied to the total assessed value of the property in the redevelopment project area. Key to the value of the bonds and the security for investors was the increase in tax revenue from the valuations of the property and the overall debt service ratio.

The bond offerings were used to finance the construction of a power plant and four new hangers on the Air Force base along with what the complaint describes as "a number of ill-conceived redevelopment projects." By the second year of the program an additional $50 million was needed for the power plant. The Airport Authority sought to raise the money in a new $68 million financing. In view of market conditions, however, only $42 million was raised.

In the spring of 2008 the Airport Authority raised an additional $13.3 million in an offering of tax increment bonds. The proceeds were intended to repay part of an earlier short term loan. The offering was collateralized by the hangers, valued at $65 million. At the time City Development Director Metzler, KND owner Jeffrey Kinsell and one of the firm's employees knew that the value for the hangers was inflated, according to the SEC. That fact was not disclosed to investors.

Mr. Kinsell and KND also defrauded the city with respect to the fees charged, according to the complaint. While those should have been on a cost plus basis, they took $450,000 that was not owed. They also charged $2.3 million in so-called "fictitious" property management fees, thus effectively misappropriating about $2.7 million.

The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15B(c)(1). The case is in litigation. See also Lit. Rel. No. 22690 (April 29, 2013).

For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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