June 25 (Bloomberg) -- A city outside Chicago was blocked from selling bonds after the U.S. Securities and Exchange Commission accused it of defrauding investors and steering secret fees to a municipal official.
The case against Harvey, Illinois, a struggling city of 25,000 battered by poverty and crime, involves about $14 million in bonds sold from 2008 to 2010 that were to pay for development of a Holiday Inn hotel and conference venue.
The SEC said that the city hoodwinked investors by using $1.7 million to pay payroll and other operating expenses, while the hotel stands in disrepair with holes in its facade, exposed studs and a gutted interior. The SEC said Comptroller Joseph Letke, 55, also profited by receiving $269,000 in undisclosed payments while advising the developer of the ill-fated project.
“Harvey’s bond investors were misled into believing their money would go toward construction of a Holiday Inn when instead the bulk of it was diverted into Harvey’s general coffers and Letke’s pocket,” David Glockner, the director of the SEC’s Chicago office, said in a statement.
The agency has been moving more aggressively to crack down on public officials who mislead investors in the $3.7 trillion municipal bond market. It has previously brought fraud cases against Illinois and New Jersey, and this month settled with a Chicago charter-school operator for failing disclose insider business dealings that led the state to withhold grants.
The SEC yesterday filed fraud charges against Harvey and its comptroller. It asked the U.S. District Court in Illinois to block new bond sales as the city considered raising more money for its latest redevelopment project, a 43,500-square-foot grocery store, as soon as this week. The agency said today that U.S. Judge Rebecca Pallmeyer issued an order blocking any such sales through July 14.
That sale was being readied despite what the comptroller characterized as a crisis that may leave Harvey unable to pay bondholders by August, according to the SEC’s complaint.
Letke didn’t immediately respond to messages left at his offices seeking comment about the sanction. A spokesman for the city said Mayor Eric Kellogg has no comment on the agency’s allegations.
“The city of Harvey is aware of the judge’s order and will cooperate fully,” Sean Howard, the spokesman, said in a telephone interview.
Harvey, south of Chicago in Cook County, is a struggling area. More than one-third of its residents lived below the poverty line from 2008 through 2012, with the median household income $28,123, roughly half what it is for the state.
The borrowing was to turn a hotel into a new, full service Holiday Inn with 10,500 square feet of meeting rooms. The city said in bond documents that it would benefit from proximity to Midway Airport, which is 22 miles (35 kilometers) away.
The project was troubled from the beginning, as almost all proceeds from the initial bond sale in 2008 were used to pay past-due loans, taxes and construction bills, according to the SEC.
The agency said the city went on to defraud investors by tapping bond money to pay bills instead of financing the project. Regulators said it failed to disclose that to investors or Letke’s fees from the project’s developer.
The project turned into a “fiasco” that left the Holiday Inn and conference center a “decrepit shell,” according to the SEC.
“We moved quickly to stop this city and its comptroller from issuing more bonds under false pretenses,” Andrew Ceresney, director of the Division of Enforcement, said in a statement.
The agency’s action follows articles in the Chicago Tribune documenting mismanagement in the crime-ridden suburb, including the failure by state officials to enforce laws requiring yearly audits of its books and the disclosure of campaign contributions.
To contact the editors responsible for this story: Stephen Merelman at email@example.com Mark Schoifet