Less than three weeks after Harvey Public Library District, Ill., officials held a groundbreaking ceremony for their multi-million-dollar library expansion in 2015, the Securities and Exchange Commission launched an investigation into the project's funding source, records obtained by the Daily Southtown show.
According to subpoenas served on the library district, the SEC opened an inquiry into the $6 million bond issue the library used to fund the expansion, demanding a trove of documents related to the borrowing plan and the financial firms that helped structure and execute it.
Subpoenas issued by the SEC in April and June of 2015 asked for the library’s bonding policies and procedures; requests for proposal issued in connection with the bonds; executed contracts with firms that worked on the bond offering; and documents identifying library personnel involved in drafting and negotiating the bond pricing, among other things.
The probe was authorized under Section 21(a) of the Securities Exchange Act of 1934, which deals with insider trading, but its precise focus is unclear.
An SEC spokesman declined comment on the matter and would not say whether the investigation is ongoing.
Library officials said in a statement that they cooperated fully with the SEC probe, but declined to answer specific questions or say whether the inquiry remains active.
The bonds in question were issued nearly four years after Harvey voters approved a 2011 referendum that sought $16.2 million to construct a new library building.
In the intervening years, library officials scaled down the project, ultimately settling on borrowing $6 million to fund an expansion of the existing library. The money would be repaid by property taxes.
Bond documents list IFS Securities as underwriter, Kutak Rock as bond counsel and Comer Capital Group as financial adviser. None of the firms were selected through a competitive bidding process, records show.
Calls placed to Kutak Rock and Comer Capital went unreturned. IFS Securities president and CEO Alex McKenzie declined comment.
The library’s primary point person for the bond offering was Alvin Boutte, Jr., a former securities dealer whose license was suspended by the state in 2011 for providing unsound investment advice to the Illinois Student Assistance Commission, according to Illinois Securities Department records.
Boutte confirmed in a brief phone conversation that he had done the underwriting for the Harvey library bond, then ended the call. He did not respond to subsequent interview requests.
According to library meeting minutes, Boutte told trustees at a February 2014 meeting that he looked at the library’s financial information, and would give them an idea of what they could secure for the library project, minutes show.
Three months later, the board voted unanimously to hire Boutte as underwriter and voted in August to sell the bonds at a price he recommended, minutes show.
Library officials entered into a bond purchase agreement with IFS Securities — Boutte’s employer at the time — in January 2015, records show.
The deal set the purchase price at $6,733,740 with a 7.1 percent interest rate, also known as the coupon rate. The library district received more than the $6 million face value of its bond because it issued the security at a premium, meaning it got more money up front, but would have to pay a higher interest rate to investors over time. The 7.1 percent coupon was the highest coupon on any comparable municipal security issued in Illinois that year, according to Bloomberg L.P.
“Having such a high coupon would indicate it’s an outlier in a bad way,” said Matt Fabian, a partner at the municipal bond research firm Municipal Market Analytics. “Sometimes (issuers) will use a high coupon to entice buyers, but that usually stops around 5 percent.”
In addition to its elevated coupon, the library district’s $429,104.88 cost of issuance, which includes an underwriter’s fee paid to IFS and additional issuance costs, also appear high, said Michael Belsky, executive director at the Center for Municipal Finance at the University of Chicago’s Harris School of Public Policy.
Municipal underwriters typically receive between 0.5 and 1 percent of the bond principal, he said, which in this case would be $30,000 to $60,000. IFS was paid $210,000, according to the bond purchase agreement.
“(The financial firms) really did get highly paid for an issue this size,” Belsky said. “It does seem excessive.”
Keith Price, a Harvey alderman who served as the library board’s president during the time the bond was being discussed, said he brought in Boutte — whom he knew through his time on the Harvey Park District board — on a volunteer basis.
“That was the only person I knew at the time who dealt with bonds,” Price said. “So I told him that, hey, the (library) board passed something dealing with floating a bond, they have a lot of questions. Would you mind coming in and explaining to the board? And he did that.”
Price said he didn’t want to take a chance with the city’s bond advisers.
He said he had a great working relationship with Boutte and had not at the time been aware of the broker’s 2011 suspension by the Illinois Securities Department for allegedly breaching his duty to provide investment advice in the best interest of a client.
The bond deal also was unusual, Fabian said, because the library district allocated nearly $1 million to debt service, which should not have been necessary.
“These sorts of bonds, which are paid for by a special property tax, almost never have a reserve fund,” he said. “It’s not a typical practice.”
Lisa Washburn, managing director for Municipal Market Analytics, said that while the bond’s peculiarities raise concerns for her as a credit analyst, there could also be legitimate explanations for its unusual structuring — like Harvey’s reputation.
“The name ‘Harvey’ could mean that buyers demand more yield on that,” she said. ”There could be reasons for all of this.”
In addition to its structuring, the bond’s initial trading activity also may have attracted federal investigators’ attention, Fabian said.
According to EMMA, an electronic system operated by the Municipal Securities Rulemaking Board that tracks the trades of individual securities but does not disclose the traders’ identities, the library bond was sold three weeks after being issued at a nearly $400,000 profit to someone who immediately resold it for a $163,320 gain.
“Bonds do trade up,” Fabian said. “But that kind of a gain for this small deal, it might create scrutiny.”
Whether any of those things raised red flags for federal officials is not clear. But some appear to have concerned local residents at the time.
Library board minutes show Boutte was compelled to respond to “rumors of a Junk Bond,” in 2015 even though Standard and Poor’s had assigned the bonds an investment grade rating.
Harvey resident Mauzkie Ervin, who has since become a library trustee, addressed the board at that meeting to share his concern that it had gotten “a really bad deal on the bond,” stating that even the City of Harvey, which had not completed annual audits, was able to secure lower interest rates than the library, minutes show.
Price, the former library board president, acknowledged recently that, “maybe it was a bad rate,” but said there was little the board could do about it at the time.
The SEC had just filed fraud charges against the City of Harvey and its comptroller in connection with a separate bond offering involving the redevelopment of a rundown hotel, Price explained, and that had dried up the library’s pool of potential investors.
“The rate went up after that stuff had hit the news about that hotel deal,” he said. “It was like people backed out because they were still trying to make a deal with Harvey, and instead of looking at (the Harvey library) as a separate entity, I don’t think many people did that.”
In October 2015, a few months after the SEC subpoenaed the library district, its board hired Perkins Coie to serve as its “securities litigation counsel,” minutes show.
Jon Buck, the attorney representing the library district, declined comment for this article and referred questions to the library district.
Price said he had no knowledge of the SEC investigation.
“I know the board didn’t do anything out of pocket, and if anybody we were dealing with done anything that was wrong or detrimental to the residents, I would hope they’d have been charged by now,” he said.
In the end, Price said, Harvey residents who voted for the 2011 bond referendum got the “awesome” library they wanted, even if it ended up costing more than the board had originally hoped.
With annual payments of about $640,000 due on the bond for each of the the next 15 years, the library district’s total cost will exceed $11 million by 2032. The district levied more than $1 million in special property taxes this year to pay for the bond, in addition to the $1.4 million in other library taxes it levied. As a result, the owner of a home with Harvey's median value of $72,700 will pay about $61 in taxes for the special assessment this year and about $142 in library taxes total.
“I don’t think it was a horrible deal,” Price said. “I think we got caught in the middle of the brouhaha with the newspapers and the actual city of Harvey, and it hurt us.
“As a board, I believe we voted on what we thought was the best, or the only damn thing we had at that time.”
