Fraud claim dropped, Victorville OKs settlement in long-running SEC case

VICTORVILLE, Calif. — Federal securities regulators have dismissed the most serious claim against the city’s airport authority and removed a top official from litigation altogether as part of a settlement reached in the long-running legal battle over a controversial tax increment bond offering in 2008.

The deal, approved by the Securities and Exchange Commission on July 19 and the City Council on Tuesday, dropped the intentional fraud claim against Southern California Logistics Airport Authority (SCLAA) as well as aiding and abetting fraud claims against both the city and City Manager Keith Metzler — dismissing Metzler as a defendant from the case entirely.

The city and SCLAA instead agreed to a judgment alleging negligence — without admitting nor denying the claim — stemming from their roles in the municipal bond offering a decade ago.

Victorville City Hall

"We're very pleased the SEC is agreeing to drop the aforementioned claims against the city, airport authority and ... Metzler," city spokeswoman Sue Jones said in a statement. "With this settlement, Victorville is turning a corner."

The city has spent $19.6 million in legal fees connected to the case as of Tuesday, Jones said, with $5.7 million contributed from the general fund and the remaining from the airport fund.

In April 2013, SEC officials accused the defendants — including a bond underwriter — of defrauding investors by vastly inflating the $65 million valuation of four airport hangars used to secure the offering, enabling the airport authority "to issue substantially more bonds and raise more money than it otherwise would have."

The SEC will abandon any efforts to secure civil penalties or disgorgement of money, city documents and federal court records show. In exchange, the city and SCLAA will be permanently enjoined from violating federal securities law and undergo an independent consultant's review of its current accounting and record-keeping practices connected to municipal bond proceeds.

Terree A. Bowers, a lawyer with Los Angeles-based Arent Fox LLP, which represented the city and airport authority, described it as "a favorable resolution."

The SEC will file a second amended complaint in federal court within five days that reflects the settlement terms, court records show, and the deal will be finalized pending approval by the U.S. District judge overseeing the matter.

An email to the agency sent Tuesday requesting comment was not immediately returned.

"It's such a wonderful feeling. I mean it has been such a long time," Mayor Gloria Garcia said, noting how the litigation sprung up only months after her first election. "I just feel so relieved and overjoyed; for Mr. Metzler, mainly, for the city, for the people. I just feel so relieved that this is behind us and it shows the integrity for our city and for our city manager and, overall, I feel that we deserve a congratulations."

But the cheer wasn't unanimous among elected leaders. Councilwoman Blanca Gomez voted down the settlement twice — first in her Council capacity, then acting as an authority board member — and stunningly called for the case to continue to trial.

Gomez said she instead preferred to "have the city find out the perpetrators and the criminals who have defense by city taxpayers, for the taxpayers to get justice. That's why we have a justice system."

The Daily Press reported in May that the two sides had reached proposed settlement agreements in principle right as the case seemed headed to trial after extensive delays over the past several years.

The settlement signals the end of a five-year legal tug of war and an even older dark cloud for the city that dates to August 2010 when the SEC first subpoenaed documents from the city as part of a nascent inquiry into how it had spent some $480 million in bond offerings.

City officials had expressed, at least publicly, the view that the case was weak and seemingly each year declared optimism over the prospects it would soon be over.

In 2008, the airport authority publicly offered $13.3 million in tax increment bonds to repay part of a short-term debt.

The bond offering was partly premised on a $65 million valuation of the four hangars, used to determine the tax increment and enabling the authority to meet a minimum 1.25 annual debt service ratio.

The SEC argued officials knew the county assessor had valued the hangars at only $27.7 million, and the resulting discrepancy led to a false statement being issued to investors.

In one 2013 filing, in an effort to dismiss the claims, the city and airport authority's lawyers said that the difference in assessments didn't change the debt service ratio, "upon which an investor might rely."

"The alleged $37.3 million inflated value," they wrote in the filing, "ultimately boils down to only a $200,000 differential in tax increment," or too small to be material.

A former executive with the bond underwriter, Kinsell, Newcomb and DeDios Inc., has been permanently enjoined from violating federal securities law as part of a settlement with the SEC.

Claims appear to remain unresolved against the bond underwriter and its top executive, court records show, who were also accused of taking unauthorized construction and management fees for a hangars project at the airport.

Tribune Content Agency
Crime and misconduct SEC California
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