WASHINGTON - Two former Allen Park, Mich. officials have settled a Securities and Exchange Commission lawsuit against them by agreeing to be barred from involvement in any future municipal bond offerings, and ex-Mayor Gary Burtka agreed to pay a $10,000 civil penalty, according to court documents filed Wednesday.
Federal judge Avern Cohn, of the U.S. District Court for the Eastern District of Michigan, Southern Division, signed the final judgments against Burtka and former city administrator Eric Waidelich after previously taking the unusual step of vacating the same settlement agreement in November.
That month the SEC charged Allen Park, a suburb of Detroit, and the two men with fraud in connection with $31 million of general obligation bonds floated in 2009 and 2010 to finance a now-failed movie studio. The SEC charged that the offering documents provided to investors contained false and misleading statements about the scope and viability of the movie studio project, as well as Allen Park's overall financial condition and its ability to pay debt service
Both men agreed to the terms of their settlements without admitting or denying the SEC's findings. The case against the city was put to bed in a separate administrative proceeding.
The settlements are among the first to bar a former municipal official from participating in future bond offerings, effectively ending their careers overseeing muni finance. The SEC first sought such a bar in its June 2014 complaint against the City of Harvey, Ill. and its then-Comptroller Joseph Letke, and a federal judge granted that condition in a settlement Wednesday. In 2012, the SEC sought to bar former Detroit Mayor Kwame Kilpatrick and the city's former treasurer from participating in any decisions involving investments in securities by public pensions.
Peter Chan, a partner at Morgan, Lewis & Bockius in Chicago who left the SEC's enforcement division last year, said the latest injunctions are "related cousins" to the Kilpatrick case. Chan pointed out that it is not impossible that a former official charged by the SEC could return to public office at some point, making such permanent bans noteworthy.
"These kinds of conduct-based injunctions are very meaningful," Chan said.
Vacating the original settlements with Burtka and Waidelich, the 90 year-old Detroit-born Cohn said the court needed more information about the case, in particular about the role underwriters played in the sale of bonds. Last month the SEC asked Cohn to accept the settlements, pointing out that the bonds were sold competitively and the underwriters were not privy to as much information as they would have been in a negotiated sale.
In comments filed with the court Wednesday, Cohn said he was initially concerned with the narrow scope of the punishments.
"Initially, the court was puzzled because of the intense interest of the SEC in disclosure problems in municipal financings," Cohn wrote. "It wanted to know why in a $30 million fraudulent bond offering, only two unsophisticated municipal officers were charged with wrongdoing, and why sophisticated third-party participants had, in the SEC's view, not called to account."
Cohn also added that after accepting the settlements, he remains concerned that authorities are unable to act until fraudulent debt has already caused harm to investors and taxpayers. Cohn noted that Michigan once had a state agency called the Municipal Finance Commission that oversaw local borrowing and reviewed bonds before sale, but the MFC was abolished in 1984 and most of its duties absorbed into the state treasurer's office.
"However, these duties do not appear to encompass prior approval of the issuance of municipal bonds," Cohn wrote. "In other words, it is only after fraud is uncovered and a municipality loses its financial footings does the state take action."
