WASHINGTON — The Securities and Exchange Commission has charged Allen Park, Mich., and two former city leaders with fraud in connection with $31 million municipal bonds sold in 2009 and 2010 to finance a movie studio project in the city.
The SEC found that offering documents provided to investors during the Detroit suburb's sales of the general obligation bonds contained false and misleading statements about the scope and viability of the movie studio project, as well as Allen Park's overall financial condition and its ability to pay debt service.
The city and the two officials — former mayor Gary Burtka and former city administrator Eric Waidelich — have agreed to settle the SEC's charges. 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.
The enforcement action stems from Michigan's enactment of legislation in April 2008 that provided tax credits to film studios conducting business in the state. In August of that year the city was approached by a California-based producer who wanted to build what became Unity Studios.
The city believed the project would revitalize its economy, and agreed to issue $28.3 million of general obligation limited tax bonds issued in Nov. 2009 and another $2.7 million of general obligation limited tax bonds in June 2010. The project was to be a public-private partnership, with the city using the muni bond proceeds to buy the land. The developer would finance the structures and a producer would line up investors and film projects.
The city faced a roughly $2 million deficit in its fiscal 2010 budget, but the producer offered to provide the money to erase it. Waidelich originally understood that the $2 million would be a gift, but the producer sent him a letter in May 2009 stating that the money was a "capital repayment" contingent on the city's contribution of land to the P3.
The plan quickly fell apart. In July 2009, the city's bond counsel advised that the bond proceeds could not be used to purchase land that would then be donated to the P3. Allen Park was therefore unable to join the partnership. The developer, which had pledged $20 million, was free to walk away and the producer was no longer obligated to pay the $2 million.
SEC investigators found that Waidelich took steps to create the impression that the city would still get the $2 million, which represented more than 8% of the city's budget. The city decided to own and manage the property itself, but the producer had not lined up the anticipated investors and some county financial assistance the city had expected was also reduced. The producer agreed to lease a fraction of the property to operate a small film vocational school.
Investors learned nothing of these developments, the SEC found, because the official statements for the bonds continued to misleadingly detail a city budget with no deficit and a studio project bringing in more than $1.5 million annually from lease revenue. These misleading statements violated federal antifraud provisions. The SEC alleged that Burtka was liable as a "control person" under Section 20(a) of the Securities Exchange Act of 1934, based on his control of Waidelich and the city. This is the first time the SEC has charged a municipal official under that part of the law.
"When a municipal official like Burtka controls the activities of others who engage in fraud, we won't hesitate to use every legal avenue available to us in order to hold those officials accountable," said LeeAnn Gaunt, chief of the SEC enforcement division's municipal securities and public pensions unit.
Andrew Ceresney, Director of the SEC enforcement division, said the city failed to live up to its obligations to be honest with investors.
"Allen Park solicited investors with an unrealistic and untruthful pitch, and used outdated budget information in offering documents to avoid revealing its budget deficit," He said
In September 2010, the producer terminated his lease. Waidelich resigned in February 2011 and Burtka the following May. Michigan appointed an emergency manager for Allen Park in October 2010, citing the failed project as a primary factor in the city's economic condition. The city recently emerged from formal emergency management but the state maintains oversight of its finances.
Mark Mandell, an attorney who represents Waidelich, said his client cooperated fully with the SEC and that his actions were not of his own initiative.
"Mr. Waidelich acted at the bequest of the mayor, council members, and bond attorneys," Mandell said.
Attorneys for the city and for Burtka could not be reached for comment.