SAN FRANCISCO, April 29 (Reuters) - U.S. securities
authorities accused the city of Victorville, California on
Monday of defrauding bond investors by inflating the value of
the property used to secure a 2008 bond sale.
The Securities and Exchange Commission also charged an
airport authority controlled by Victorville, a city official and
the underwriter Kinsell, Newcomb & De Dios, saying it misused
more than $2.7 million of bond proceeds to "keep itself afloat."
The bonds were issued to refinance debt for airport hangar
construction and other redevelopment projects, according to the
SEC, which filed its complaint in the U.S. District Court for
the Central District of California.
The SEC is seeking the return of ill-gotten gains and other
penalties from all defendants.
The airport authority initially financed building four
airplane hangars on a former Air Force base and the other
projects with tax increment bonds, according to the SEC. The
debt is repaid by property-tax increases.
The authority partly refinanced the debt in 2008 and based
the principal of new bonds on a $65 million valuation of the
hangars determined by the underwriters. The county assessor,
though, valued the hangars at less than half the amount, the SEC
The higher amount allowed to the authority to issue more
bonds and also gave bond buyers false information about the
security of being repaid, the SEC said.
About $55 million in airport authority debt issued in 2007
and 2008 is currently in default, and as of this month traded at
roughly 45 cents on the dollar, the regulator said.
Kinsell, Newcomb & De Dios (KND)and its law firm were not
immediately available for comment on the SEC's suit.
Victorville officials could not immediately comment on the
complaint which they said they had not seen, city spokeswoman
Monica Peterson said.
But in a statement she said unless there SEC has new
evidence, "we believe we will be able to completely and
successfully defend the actions."
A lawyer for both Victorville and the Southern California
Logistics Airport Authority, Terree Bowers, said, "We
respectfully disagree with the SEC's allegations as we
understand them and we intend to vigorously fight this case."
According to the SEC complaint, "misstatements and omissions
in the Official Statements for the Authority's bonds from
November 2006 through April 2008 were material because a
reasonable investor would want to know about an undisclosed
financial arrangement" involving the underwriter.
"These misstatements and omissions were also material to the
Authority because such fees increased the costs of issuing the
bonds," the complaint added.
Bowers disputed how the SEC's complaint characterized
omissions in official bond statements. "Sometimes, there are
omissions that have no impact on the bond offering," he told
Reuters. "For them to be actionable they have to be material."
The SEC's complaint identified the entity as KND Affiliates
LLC and described it as partially owned by the underwriter and
used to manage bond-financed work at the airport.
KND Affiliates "exploited" a fee arrangement for its
services to pay itself at least $450,000 more in fees than it
was owed and misappropriated $2.3 million of bond proceeds
through a fictitious 15 percent monthly "property management
fee," the SEC said.