DALLAS - A Utah district that defaulted on $41 million of bonds for a failed wastewater treatment plant distorted and withheld information about its accounting and business practices, according to a report from the state Auditor's Office.
The Jordanelle Special Service District, a Wasatch County entity authorized to build a wastewater treatment facility, tried to impede efforts to gather information about how money was used in multiple accounts, the
"The district's response is consistent with the district's approach throughout the audit, which has been to defend inappropriate activity and cloud relevant facts by distorting, deflecting, and manipulating facts and information," the audit said. "Essentially, the district defends certain actions simply by throwing mud in a clear pool of water so that the picture becomes cloudy."
The district is managed by the Wasatch County Council, which is also named in a lawsuit filed by bondholders.
Audit Director Van Christensen said his office began investigating the district after receiving complaints about mismanagement. While investigators did not find outright fraud or corruption, they determined that the district was poorly managed for years and failed to keep required records.
"We did not find an instance of fraud that we could point to," Christiansen told The Bond Buyer. "But because the records were so poorly kept, we could not say it did not occur."
Mike Kohler, a former Wasatch County commissioner who became Jordanelle service district chairman in January, called the audit "embarrassing."
"It's not pretty and I'm not happy about it," Kohler told the Deseret News. "It's somewhat embarrassing. But I've got to take what's coming and get through it now and answer the questions. We'll do what we need to (do) to make sure it doesn't happen again."
The district said it had "raised concerns that the investigation was being undertaken for the benefit of private litigants," According to its official response to the audit.
"The Auditor should follow its own policy which is not to accept or pursue such investigations when parties are embroiled in pending lawsuits," the district said.
"Although JSSD welcomes this investigation, it appears the Auditor's office has ignored its own policies in doing so."
The district also said that it "did not seek to resist, intentionally delay or oppose the Auditor's request for information. JSSD was careful to inspect and ensure all records were made available and that the responses were accurate."
Christiansen denied that the audit was done at the behest of attorneys for bondholders and property owners involved in litigation over the treatment plant. In fact, Christiansen said, the audit produced no evidence that proceeds from the bonds were misused.
"All the facilities have been built according to the specifications," he said. "If the bond proceeds had been misused, they would not have been able to build the facilities."
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By building a plant that was three times what was needed for the assessed property owners, the district sought to "reap a windfall from properties located outside the assessment area at the expense of the bondholders and the assessed properties," the suit claims.
Although the plant is completed, it is not operational because there are not enough homes to make it viable, according to the lawsuit.
"At the current rate of development, it could take approximately 50 years before the facility would become operational," the lawsuit says.
The default on the bonds is the first in Utah history, according to the lawsuit. The controversy has prompted multiple investigations, including one by the Federal Bureau of Investigation. Utah legislators have also sought a solution to the problem.
In state court filings, district officials claim that landowners simply made a bad business deal, leaving the district no choice but to foreclose on properties burdened by high assessments.
The district issued $40.9 million in bonds in 2009 to pay for a network of pipes and a treatment plant to handle the waste from the planned 3,300 homes on the banks of the scenic Upper Provo River and Jordanelle Reservoir.
The unrated bonds were privately placed; Zions Bank Public Finance was the district's financial advisor, according to the private placement memo attached to the lawsuit.
The purchasers of the three classes of the Bonds were USAA, Wells Fargo, and Koch Financial Corp. The tax-exempt bonds were issued at a 12% interest rate.
The project failed as the real estate market struggled after the 2008 recession.
"The timing of this was just the perfect storm," Christiansen said.
Wells Fargo took control of one of six major sections of the development known as Victory Ranch in 2010 when the developer wasn't able to pay off a $50 million loan. Wells Fargo sold the property in 2012 to an investment group called Sterling Bay in Chicago for $30.8 million, including $14 million in assumed debt. That was about a third of the original $100 million value of the land, according to The Wall Street Journal.
Property owners in the district were left with millions of dollars in liability for the inoperable sewage system, which led to rapidly escalating fees.
In the USAA-Wells Fargo lawsuit, plaintiffs claim that the district tried to "put" foreclosed properties to the bondholders to resolve the district's debt.
"This leaves the bondholders with the burden of attempting to recover their investment through the sale of the assessed properties," according to the suit. Bondholders have the right to "call" the foreclosed properties but that the district does not have the right to "put" them, the suit maintains.
Wasatch County has filed a motion seeking to be dismissed from the case on the grounds that it is a separate political entity from the Jordanelle district, even though its officials double as the district's board.
With $3.3 million of outstanding debt, Wasatch County, which has about 23,500 residents, received an upgrade from Moody's Investors Service to Aa2 from Aa3 on Feb. 19.
