California City, Underwriter Misled Investors, SEC Says

U.S. regulators accused Victorville, California, and underwriters of lying to investors by inflating property values backing $13.3 million of municipal bonds to redevelop a closed air force base.

The Securities and Exchange Commission in a complaint filed today in federal court said assistant City Manager Keith Metzler and underwriter Kinsell, Newcomb & DeDios doubled the value of four hangars at the Southern California Logistics Airport to $65 million so it could borrow more money against the property, formerly George Air Force Base.

The SEC also said that Carlsbad, California-based Kinsell Newcomb misused $2.7 million of the bond proceeds to keep the company afloat. The city and the airport authority contend the SEC complaint is “not supported by evidence,” spokeswoman Monica Petersen said in a statement. Kinsell, Newcomb didn’t retain any of the bond proceeds, Jeffery Kinsell said in a statement.

“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,” George Canellos, co-director of the SEC’s Division of Enforcement said in a statement. “Public officials have the same obligation as corporate officials to tell the truth to their investors.”

The city of 115,000 is located 85 miles (137 kilometers) northeast of Los Angeles. The Southern California Logistics Airport Authority, whose redevelopment powers are controlled by the city, sold tax-increment bonds to help finance redevelopment on and around the air base, which was closed by the federal government in 1992. Such bonds are secured by and repaid from property-tax increases attributable to gains in the assessed value of property due to development.

According to the complaint, when the city tried to borrow $68 million in 2007 to cover a $50 million deposit on a turbine for a power plant at the base, it couldn’t match the debt-service ratio demanded by investors. That forced the city to borrow $42 million instead and use all the attributable property value increase available to back any additional bonds.

So the city borrowed $35 million in short-term notes in February 2008 and then sold the $13.3 million two months later to repay a portion of that loan. In borrowing documents provided to investors for that bond, the city claimed the hangars were worth $65 million, the SEC said.

The case is Securities and Exchange Commission v. City of Victorville, 13-cv-00776, U.S. District Court, Central District of California.

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