Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—N.D. Ill.: Illinois mayor settles charges that hotel muni bond funds were improperly used for city expenses, (May 20, 2016)
The SEC announced that the mayor of Harvey, Illinois, has agreed to pay $10,000 and to never participate in a municipal bond offering again in order to settle its fraud charges against him. The Commission’s complaint alleged that the mayor was connected to a scheme that defrauded investors of at least $1.7 million which investors thought was going to build a new hotel. Instead, their money was used to fund the city payroll and other expenses not related to the hotel’s construction (SEC v. Kellogg, May 19, 2016).
Muni bond offerings. According to the Commission, Harvey conducted three bond offerings in 2008, 2009, and 2010 in order to develop and construct a hotel in the city. They were not general obligation bonds, however, and depending on the particular bond offering, they were to be repaid from dedicated tax revenue streams such as Harvey’s hotel-motel tax, sales tax revenue, or incremental tax from the Tax Increment District where the hotel was to be located. It was important that the bond money be used for the stated purpose, the Commission said, because the funds to repay the bonds derived from tax revenues would be materially affected by the existence of the hotel.
The Commission said that Harvey officials improperly diverted at least $1.7 million of bond proceeds from these offerings into the general operation accounts of Harvey to pay the city’s operation costs, including payroll, and that Harvey’s former comptroller also received approximately $290,000 in undisclosed payments derived from bond proceeds and other proceeds earmarked for the hotel. The bond investors were materially misled about the purpose and risks of the bonds they purchased from Harvey, according to the Commission.
As the result of the scheme to divert bond related proceeds, the hotel project has “turned into a fiasco for bond investors and Harvey residents,” the Commission said, pointing to news reports stating that the proposed hotel and conference center stands as an “unfinished decrepit shell.”
Mayor’s role in alleged violations. The mayor of the city exercised control over Harvey’s operations and also signed important offering documents that Harvey used to offer and sell bonds through the 2008, 2009, and 2010 bond offerings. Therefore, the SEC said, he had the authority to control the offerings and is liable as a controlling person under Exchange Act Section 20(a) for the securities violations alleged under Exchange Act Section 10(b) and Rule 10b-5.The mayor has agreed to settle the charges without admitting or denying the SEC’s allegations, according to a Commission press release. The settlement is still subject to court approval.
The case is No. 16-cv-5384.
LitigationEnforcement: Enforcement FraudManipulation MunicipalSecuritiesNews IllinoisNews