CHICAGO - A federal judge has issued an order to vacate recent Securities and Exchange Commission fraud judgments against two former public officials in Allen Park, Mich. in connection with $31 million of bonds, saying he wants more information on the bond firms involved with the troubled transaction.

Muni law experts said that they were not aware of a previous such incident in the municipal market, though judges have refused to approve settlements in other markets when they felt the penalty was too small to fit the crime.

U.S. District Judge Avern Cohn, of the Eastern District of Michigan Southern Division, issued the order to vacate the final judgments on Nov. 7, the day after the SEC unveiled its charges and the settlements with the two officials and the city of Allen Park. He had signed an order approving the settlements the day before.

Cohn called the judgments "improvidently entered," saying the court needed more information about the case, in particular about the role of the finance firms involved in the sale of the bonds.

"No mention is made in the complaint in this case …. of the role of financial advisors, underwriters, and law firms, etc., involved in the marketing of municipal bonds which are the res gestae of the alleged wrongful conduct which is the subject matter of the complaints," Cohn wrote in the order, HERE.

"The court should not approve a consent judgment without full knowledge of all the relevant facts," he said. Cohn scheduled a status conference hearing for Nov. 25.

The judge cannot charge anyone else in the case, legal experts said. But he could decide he doesn't have enough information to enter the judgment order, or he can request an explanation from the SEC of the involvement of others that could affect the state of mind or culpability of the defendants, experts said.

"Something apparently moved the judge to believe here were mitigating factors that were either not put before the court or at least not considered by the court," said a securities attorney who reviewed the order to vacate.

On Nov. 6, the SEC charged the Detroit suburb of Allen Park and two former officials -- Gary Burtka, who was mayor, and Eric Waidelich, who was city administrator -- with fraud tied to $31 million of general obligation bonds floated in 2009 and 2010 to finance a now-failed movie studio.

The SEC found that offering documents provided to investors during the debt sale contained false and misleading statements about the scope and viability of the project, as well as Allen Park's overall financial condition and its ability to pay debt service.

The city, Burtka and Waidelich agreed to settle the SEC's charges. The administrative proceeding against the city was settled before an SEC administrative law judge. But the SEC complaints against the former officials were filed in Cohn's court and he had to approve them. Waidelich agreed to be barred from participating in any municipal bond offerings and to cease and desist from further violations. Burtka agreed to pay a $10,000 penalty as well as to cease and desist from violations and be barred from future offerings. Both men agreed to the settlements without either admitting or denying the SEC's findings. The city agreed to cease and desist from violations as well as to strengthen its disclosure policies and training.

Marking a first, the SEC charged Burtka as a "control person" under Section 20(a) of the Securities Exchange Act of 1934, a provision designed to prevent leaders of issuers from escaping blame by hiding behind lower-level or 'dummy' officers.

Allen Park issued $28.3 million of GO limited tax bonds in Nov. 2009 for the project and another $2.7 million of general obligation limited tax bonds in June 2010.

Miller, Canfield, Paddock and Stone PLC was bond counsel on the original deal. A representative from the law firm declined to comment on the case.

PNC Capital Markets LLC was the underwriter and Stauder, Barch & Associates Inc. was financial advisor.

A chunk of the taxable bonds maturing in 2039 were yielding 7.389% in trading earlier this week, according to the Municipal Securities Rulemaking Board web site.

The SEC investigation was reportedly sparked by one Allen Park resident who alerted the federal agency to the deal. The resident, who asked to remain anonymous, said several residents plan to write letters to Judge Cohn urging him to pursue the case further.

"The city took a financial bath on this," the resident said. "How could it get past bond counsel? Why didn't anyone take a closer look? If the [Burtka fine] is only $10,000, does that really stop future city officials?"

Allen Park, meanwhile, is still hoping to refinance the bonds within the next few weeks in order to achieve savings. The debt would likely be sold through the Michigan Finance Authority.

The city in late August sold the property that was to be redeveloped with the original bond issue. The sale triggered a 90-day window that allows the city to redeem the bonds.

Allen Park City Administrator Karen Folks did not return phone calls by press time. The SEC declined to comment.

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