SEC Probes California Boomtown’s Soured Gamble on GrowthJames Nash
David Greiner, a Buick-GMC dealer in the Mojave Desert town of Victorville, California, keeps a Securities and Exchange Commission complaint in his desk, with passages underlined in black pen and notes scribbled in the margins, ready to pick apart the case when anyone asks.
Greiner, who heads the chamber of commerce, has cause for concern. The SEC’s target is the redevelopment of a former U.S. Air Force base, once the area’s largest employer. Rechristened the Southern California Logistics Airport, Greiner says it’s “vital” to the future of the community, 85 miles (135 kilometers) northeast of Los Angeles.
“The underpinnings of this local economy are going to be what we can accomplish out at SCLA,” Greiner said.
Victorville was the fastest growing U.S. city in 2007 after New Orleans, jumping 9.5 percent in 12 months to more than 100,000, just before the worst financial crisis since the Great Depression. Foreclosures are running at more than double the national rate, according to RealtyTrac Inc. Unemployment was 12.7 percent in March, when the state averaged 9.4 percent, the California Employment Development Department said.
The city’s biggest asset, at least in terms of geography, is the former George Air Force Base. Its 15,050-foot (4,587-meter) runway is second only to Denver as the longest for public use in the U.S.
City officials, who controlled the Southern California Logistics Airport Authority, came up with plans for a 3,500-acre intermodal railroad complex to make the airfield a logistics hub for ports in Los Angeles and Long Beach.
Victorville issued $13.3 million in municipal bonds for four new hangars and planned a power plant in addition to the rail facility -- projects called “ill-conceived” by the SEC in its complaint filed April 29 in federal court in Riverside, California.
The complaint accused the city, Assistant City Manager Keith Metzler and underwriter Kinsell, Newcomb & DeDios of lying to investors by doubling the value of the four hangars backing the bonds to $65 million in the April 2008 official statement. The hangars were worth less than $28 million, based on San Bernardino County assessor’s records, according to the complaint.
The SEC also accused Carlsbad, California-based Kinsell Newcomb of misappropriating $2.7 million of the bond proceeds.
The city and the airport authority contend the SEC complaint is “not supported by evidence,” spokeswoman Monica Petersen said in a statement.
Metzler, who continues to work for Victorville, “conducted himself appropriately at all times,” said his attorney, James Kramer.
Jeffrey Kinsell, the principal of Kinsell, Newcomb & DeDios, said his company spent $56 million to build the four airplane hangars and that the values cited by the county assessor were “works in progress.”
The bond proceeds that the SEC accused Kinsell of misappropriating actually were management fees to which the company was entitled for maintaining the hangars after they were supposed to be turned over to the city in December 2007, Kinsell said by telephone.
The airport authority defaulted on two bonds in December 2011. The railroad complex is on hold, City Manager Douglas Robertson said.
A victory by the SEC could stunt Victorville’s economic recovery, said Terree Bowers, a partner at Los Angeles-based Arent Fox LLP representing the city.
“It is highly likely that if the recession had not occurred, no one would have been looking at these bonds,” said Bowers, the former U.S. Attorney for the Central District of California. “It’s a mistake for the SEC to treat municipalities the same way they treat corporations.”
SEC spokeswoman Christina D’Amico declined to comment, saying the commission typically doesn’t discuss cases that are in litigation.
At his car dealership, Greiner, 35, said the failed redevelopment projects and bond defaults are part of the boom-and-bust pattern that has long afflicted the Victor Valley, an area of about 400,000 people with lower land values than Los Angeles and its more immediate suburbs.
Projects like the rail facility and power plant made sense at a time when Victorville and nearby communities were among the fastest-growing in the nation, said Greiner, who has lived in the valley since 1986.
“It did seem back then that we really needed to keep up with the needs of a growing area,” he said.
Even with the failed projects, the base and the area around it remains a source of growth and opportunity, Greiner said. More than 2,000 jobs have been created at the logistics airport, with the potential for more than 20,000 once redevelopment is completed, according to the city’s website.
Companies operating on the former base include the Dr Pepper Snapple Group Inc., General Electric Co., M&M Mars Inc., United Furniture Industries LLC, Boeing Co., Plastipak Holdings Inc. and Newell Rubbermaid Inc., according to the city website.
Stirling Development LLC, based in Foothill Ranch, California, has permits for 60 million square feet of warehouses and other buildings at the airport and has built about 3 million square feet, said Brian Parno, the firm’s chief operating officer. The defaults and SEC investigation haven’t damped interest, Parno said.
“Victorville as a government has had a lot of questions raised about it, but the real-estate part of SCLA has been a success by any measure,” Parno said by telephone.
As empty parcels closer to Los Angeles become developed and regional land values rise, Victorville will become more attractive to developers, particularly in the goods-management industry, said John Husing, a regional economist.
“Frankly, when the market needs to go someplace, it goes there under practically any circumstances,” Husing said.
The case is Securities and Exchange Commission v. City of Victorville, 13-cv-00776, U.S. District Court, Central District of California (Riverside).