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Archive for April, 2013

SEC charges Victorville and others in connection with municipal bond offering

The Securities and Exchange Commission today charged that the City of Victorville, Calif., a city official, the Southern California Logistics Airport Authority, and Kinsell, Newcomb & DeDios (KND), the underwriter of the Airport Authority’s bonds, defrauded investors by inflating valuations of property securing an April 2008 municipal bond offering.

Victorville Assistant City Manager and former Director of Economic Development Keith C. Metzler, KND owner J. Jeffrey Kinsell, and KND Vice President Janees L. Williams were responsible for false and misleading statements made in the Airport Authority’s 2008 bond offering, the SEC alleged. It also charged that KND, working through a related party, misused more than $2.7 million of bond proceeds to keep itself afloat.

“Financing redevelopment projects by selling municipal bonds based on inflated valuations violates the public trust as well as the antifraud provisions of the federal securities laws,” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement. “Public officials have the same obligation as corporate officials to tell the truth to their investors.”

Elaine C. Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, said, “Investors are entitled to full disclosure of material financial arrangements entered into by related parties. Underwriters who secretly line their own pockets by taking unauthorized fees will be held accountable.”

The SEC alleges the Airport Authority, which is controlled by the City of Victorville, undertook a variety of redevelopment projects, including the construction of four airplane hangars on a former Air Force base. It financed the projects by issuing tax increment bonds, which are solely secured by and repaid from property-tax increases attributable to increases in the assessed value of property in the redevelopment project area.

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, by April 2008, the Airport Authority was forced to refinance part of the debt incurred to construct the hangars, and other projects, by issuing additional bonds. The principal amount of the new bond issue was partly based on Metzler, Williams, and Kinsell using a $65 million valuation for the airplane hangars even though they knew the county assessor valued the hangars at less than half that amount. The inflated figure allowed the Airport Authority to issue substantially more bonds and raise more money than it otherwise would have. It also meant that investors were given false information about the value of the security available to repay them.

In addition, the SEC’s investigation found that Kinsell, KND, and another of his companies misappropriated more than $2.7 million in bond proceeds that were supposed to be used to build airplane hangars for the Airport Authority. According to the SEC’s complaint, the scheme began when Kinsell learned of allegations that the contractor building the hangars had likely diverted bond proceeds for his own personal use. When the contractor was removed, Kinsell stepped in to oversee the hangar project through another company he owned, KND Affiliates, LLC, even though Kinsell had no construction experience.

The SEC alleges that the Airport Authority loaned KND Affiliates more than $60 million in bond proceeds for the hangar project and agreed that as compensation for the project, KND Affiliates would receive a construction management fee of two percent of the remaining cost of construction. However, Kinsell and KND Affiliates took an additional $450,000 in unauthorized fees to oversee the construction and took $2.3 million in fees that the Airport Authority was unaware of and never agreed to, purportedly as compensation to “manage” the hangars. The SEC alleges that Kinsell and KND Affiliates hid these fees from the Airport Authority representatives and from the auditors who reviewed KND Affiliates’ books and records.

The SEC’s complaint alleges that the Airport Authority, Kinsell, KND, and KND Affiliates violated the antifraud provisions of U.S. securities laws and that KND violated 15B(c)(1) of the Exchange Act and Municipal Securities Rulemaking Board Rules G-17, G-27 and G-32(a)(iii)(A)(2). The complaint also alleges that Victorville, Metzler, KND, Kinsell, and Williams aided and abetted various violations. The SEC is seeking the return of ill-gotten gains with prejudgment interest, financial penalties, and permanent injunctions against all of the defendants, as well as the return of ill-gotten gains from relief defendant KND Holdings, the parent company of KND.

Gold takes largest single day plunge since 1980s

Gold plunged for the second straight day Monday, dropping more than 8% at midday in what was shaping up as the metal’s biggest one-day percentage decline in 30 years.  Gold for April delivery, the front-month contract, was down 8.6% at $1,372.10 a troy ounce on the Comex division of the New York Mercantile Exchange at midday in New York, its lowest price in more than two years.

Traders said part of the plunge in prices was a result of investors choosing to sell gold instead of putting up more money as collateral to keep their wagers open. Traders typically put down just a small percentage of a gold contract’s full value in order to trade it, and this amount, known as margin, must be increased when prices fall.

Gold for June delivery hit a low of $1,355.30 an ounce, a decline of 9.7%, in intraday trading. The precious metal later pared losses to trade down $128.90 an ounce.


Ponzi scheme architect sentenced to 10 years

A man accused of cheating California residents out of hundreds of millions of dollars in what prosecutors characterized as one of the largest real estate Ponzi schemes in state history has been sentenced to 10 years in prison.

A Shasta County Superior Court judge issued the sentence against Gary Armitage, 62, on Monday, as some of his victims spoke out against him in court.

“All of your words and promises turned out to be lies,” said Ron Johnson, of Auburn, a retired insurance company employee. “Not only did you steal the money we worked for our entire lives to save, you destroyed our ability to trust in others and ourselves.”

Johnson said Armitage persuaded him and his wife, Sandy, to refinance their home and sell a rental property to invest more money with him. The couple lost $1.2 million, according to court records.

In all, prosecutors said Armitrage and two accomplices—James Koenig, of Redding, and Jeffrey Guidi, of Santa Rosa—bilked 2,000 investors out of $200 million. Many of the victims were retirees who lost much of their life savings.

Armitage pleaded no contest in January, four years after his arrest, to four felony counts of conspiracy and securities fraud. Koenig went on trial in January and has pleaded not guilty. Guidi has also pleaded guilty to lesser charges.

Prosecutors said the three men sold real estate investments, promising low-risk returns. But many of the projects faltered or were never finished. Still, the men continued to raise money from investors, using it to pay off earlier investors, according to prosecutors.

Senate confirms White as SEC Chairman

The U.S. Senate on Monday confirmed former federal prosecutor Mary Jo White as the new head of the U.S. Securities and Exchange Commission, the agency tasked with policing Wall Street and writing new rules of the road for financial markets.

White received wide bipartisan support in the Senate thanks to her reputation as a tough former U.S. Attorney for the Southern District of New York, where she went after mobsters and terrorists.  White was nominated in January by President Obama, roughly a month after SEC Chairman Mary Schapiro stepped down from the post.

She sailed through her March 12 confirmation hearing before the Senate Banking Committee and received little opposition on March 19 when the panel voted 21-1 to send her confirmation to the full Senate.

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