WASHINGTON -- Retirement center bond underwriter Robert M. Buchanan Jr. was sentenced yesterday to three years in prison and ordered to pay bondholders half a million dollars by a federal court in Columbia, S.C., after being convicted on 13 counts of federal fraud in a multimillion dollar municipal securities.
The conviction followed a three-week trial of Mr. Buchanan and a business partner--one of the few federal criminal prosecutions ever brought in the nation for securities fraud involving municipal bonds.
Prosecutors charged that the $16 million Skylyn Hall retirement center in Spartanburg, S.C. -- funded by bonds underwritten by Mr. Buchanan's former firm, Buchanan & Co. of Jackson, Miss. -- was financed through an official statement rampant with false, misleading, and incomplete information distributed to the 2,335 purchasers nationwide.
Mr. Buchanan's firm is in bankruptcy following the underwriting of 65 retirement centers bond issues, totalling $400 million, that are now in default. The Skylyn Hall issue ultimately defaulted and the project was sold for roughly $6 million, at a major loss to investors.
Mary Gordon Baker, assistant U.S. attorney for the district of South Carolina, said yesterday in a telephone interview that her office places a high priority on pursuing municipal bond fraud cases. She said the Buchanan case was the first criminal securities fraud case ever prosecuted in her judicial district.
"We consider bondholders really vindicated. It sends the message that this kind of fraud is not going to be tolerated in the financial markets of this country," she said.
Ms. Baker would not comment on other possible investigations. But she said that "health-care fraud of all kinds" has been declared one of the Justice Department's priority areas for investigation and prosecution.
Also yesterday, Skylyn Hall developer Charles Donald STone, described by prosecutors as a "mogul" in the development of nursing homes and retirement centers in the southeast, was sentenced to five years in prison and payment of $1 million in restitution to bondholders.
Mr. Stone owned two related companies, United Medical and Surgical Supply Corp. and Unico Develop Services, which were placed on probation for five years each. Unico was ordered to pay an additional $50,000 in restitution to bondholders.
On Monday, Episcopal minister C. Benjamin Smith, president of the management and marketing firm for the 240-unit Skylyn Hall, was sentenced to five years probation and 600 hours community service. And Horace Smith, the management firm's attorney and a former South Carolina state senator who served 24 years in the legislature was sentenced to three years of probation and 200 hours of community service.
Both sentencings follow convictions on June 22, 1991, of Mr. Buchanan and Mr. Stone and the two firms on one count of conspiracy to commit securities fraud, six counts of securities fraud, and six counts of mail fraud. On May 20, 1991, Rev. Smith pleaded no contest to one count of conspiracy to commit securities fraud, 10 counts of securities fraud, and 10 counts of mail fraud. Horace Smith on May 23, 1991 pleaded guilty to one felony count of conspiracy to commit securities fraud.
Prosecutors charged that bond documents for Skylyn Hall failed to disclose that Mr. Stone and Ben Smith received hundreds of thousands of dollars of kickbacks and hidden fees in connection with Skylyn Hall. Also undisclosed were the financial problems and defaults experienced across the country on similar projects financed by Mr. Stone and Mr. Buchanan, they said.
They also said Rev. Smith and Horace Smith falsified data in official statements about the number of units presold. The document stated that as much as 25% of the units were already spoken for when in fact the percentage was lower.
Prosecutors also charged some of the deal participants with "self-dealing" involving undisclosed contracts to provide carpeting and other features.
Mr. Buchanan and Mr. Stone could have been sentenced with a maximum of five years' imprisonment and a $250,000 fine on each of the 13 counts. The case was the joint effort of the Justice Department and FBI offices in Columbia, South Carolina, and Jackson, Miss. The offices of the Mississippi and South Carolina secretaries of State and the North American Securities Administrators Association also participated.
In another widely publicized securities fraud case involving municipals, former investment banking firm Matthews & Wright Inc. and one of its officials, Arthur Abba Goldberg, entered into plea agreements in November 1990 with federal prosecutors over a $223.73 million bond issue that was sold for East St. Louis, Ill., in the mid-1980s to finance a port project.
