Update:
SAN FRANCISCO — A rural California water district is suing its former financial adviser for fraud and professional malpractice, alleging that the firm misrepresented a 1991 assessment bond which later defaulted.
The Calaveras County Water District hopes to recover $2.5 million in punitive and compensatory damages from Palm Springs-based C.M. de Crinis & Co. and its president Curt de Crinis to recoup what the district says it has spent trying to repair the troubled bonds.
"We are doing this because we feel we need to recoup the great deal of money we've expended in the process of trying to find a solution to the problem, and a big part of the problem seems to have come from the work Mr. de Crinis did," said Robert Geiszler, president of the district board.
The Calaveras district, situated about 60 miles southeast of Sacramento, defaulted on $9.7 million of limited obligation improvement bonds last year. The debt was sold to pay for sewer and water improvements at a private subdivision.
In a 37-page complaint filed in late August, the district alleged that de Crinis breached his fiduciary responsibility to the district; violated good faith and fair business practices; and intentionally misled officials about the project's viability, bond security, and the district's obligations in the event of a default. There have been no hearings on the lawsuit yet.
De Crinis was also accused of fraudulently concealing a conflict of interest involving his firm and several property owners who benefited from the bond issue. According to the lawsuit, those property owners had hired de Crinis as a financial consultant before he took the job as financial adviser to the district.
On Monday, de Crinis denied all allegations and said he will vigorously defend his company.
"We've been working very hard for the last year trying to come up with a workout solution and put a deal on the table for bondholders, and we think we've come pretty close to doing that," de Crinis said. "We are just one of a number of firms that they are upset with. I'm just real disappointed that they've decided this is the course of action they plan to take."
The 1991 issue was negotiated by Stone & Youngberg, M.L. Stern & Co., and Sutro & Co. It defaulted in March 1996.
According to court documents, the district had originally contracted Smith Barney Inc. as financial adviser and underwriter. But in late 1990, Smith Barney bankers said they were not comfortable proceeding with the bond sale because the value-to-lien ratio on the properties was too low. The county was ready to cancel the issue.
De Crinis then appeared before the board asking them to reconsider and to hire his firm as financial adviser. He told them he had greater experience with structuring these types of deals than Smith Barney did, the complaint said.
The board eventually decided to hire de Crinis, and he prepared his own analysis of the project. That analysis determined the project was viable, but indicated that there could be problem properties, according to the lawsuit.
However, funds to pay back the debt were supposed to come solely from assessments to be paid by property owners. While the sewer and water lines were laid, almost no homes have been constructed in the subdivision. That means there are few homeowners paying the assessments that, in turn, secure the assessment district bonds.
Recent foreclosure sales on the property failed to attract any legal bids because it is too laden with back taxes, penalties, and interest.
The district is considering declaring the bonds an ultimate loss, capitalizing on a rarely used California statute that allows assessment districts to cancel bonds and proportionally distribute any remaining redemption funds.
A number of bondholders have indicated that they intend to sue the district. According to the lawsuit, at least one bondholder may have filed complaints with the Securities and Exchange Commission and the California attorney general's office, alleging buyers were not informed about the true speculative nature of the project.
The district is just one of a handful of municipalities in California's Central Valley currently in trouble over land-secured assessment debt. In fact, just 15 miles away is Ione, a small city now at the center of a SEC probe into alleged disclosure violations. Also under investigation are the cities of Wasco and Avenal, as well as Nevada County.
