The Securities and Exchange Commission on Monday filed a lawsuit against Victorville, Calif., a city official, the Southern California Logistics Airport Authority, underwriter Kinsell, Newcomb & DeDios and others, charging them with defrauding investors by inflating valuations of property in connection with a 2008 bond offering.
Victorville assistant city manager and former director of economic development Keith C. Metzler, KND owner J. Jeffrey Kinsell, and KND vice president Janees L. Williams were responsible for false and misleading statements made in the airport authority’s bond offering, the SEC alleged. The authority was using tax-increment bonds secured solely by increases in property tax values for a variety of projects, including four new aircraft hangars.
According to the SEC’s complaint filed in U.S. District Court for the Central District of California in Los Angeles, the SCLAA in April 2008 was forced to refinance part of the debt incurred to construct aircraft hangars and other projects by issuing additional bonds. The principal amount of the new bond issue was partly based on Metzler, Williams, and Kinsell using a $65 million valuation for the airplane hangars, even though they knew the county assessor valued the hangars at about $27 million.
“Financing redevelopment projects by selling municipal bonds based on inflated valuations violates the public trust as well as the antifraud provisions of the federal securities laws,” said George S. Canellos, co-director of the SEC’s enforcement division.. “Public officials have the same obligation as corporate officials to tell the truth to their investors.”
In addition, the SEC’s investigation found that Kinsell, KND, and another of his companies misappropriated more than $2.7 million in bond proceeds that were supposed to be used to build the hangars for the airport authority. When a contractor accused of misusing bond proceeds was removed from the project, Kinsell stepped into the slot through subordinate company KND Affiliates to collect $450,000 in construction fees, despite a lack of construction experience.
The commission further alleged that Kinsell and KND Affiliates took and $2.3 million in “management” fees that were unauthorized by and undisclosed to the airport authority.
“KND then used the majority of these fees to finance KND’s operating expenses, including payroll,” according to the complaint.
The fees were unauthorized and undisclosed, the SEC said.
“Underwriters who secretly line their own pockets by taking unauthorized fees will be held accountable,” said Elaine C. Greenberg, chief of the SEC’s municipal securities and public pensions unit.
Around the same time of these alleged violations in 2008, KND agreed to pay the Internal Revenue Service $5 million to settle tax law violations and insure the IRS would not remove the tax-exempt status of roughly $800 million of bonds it underwrote for several California school districts. The IRS contended the deals had problems with bond and escrow security pricing.
In August last year, Kinsell threatened to sue Victorville to recover their costs of dealing with the SEC investigation and the San Bernardino County grand jury’s probe of the hangar bonds.
The SEC’s complaint alleges the airport authority, Kinsell, KND, and KND Affiliates committed securities fraud and that KND violated the Municipal Securities Rulemaking Board’s Rules G-17 on fair dealing, G-27 on supervision, and G-32 on primary offering disclosures. The complaint also alleges that Victorville, Metzler, KND, Kinsell, and Williams aided and abetted various violations.
Arent Fox LLP attorney Terree Bowers, who represents Victorville and the airport authority, said his clients will defend themselves against the charges. “We respectfully disagree with the SEC’s allegations as we understand them, and we will vigorously fight this case,” he said.
The city issued a statement accusing the SEC of jumping the gun costing the city money. “It is unfortunate SEC staff did not fully consider all of the evidence in their possession before choosing to file the complaint,” Victorville said in a release. “This investigation has cost the city in excess of one million dollars to date. Unless new facts and evidence, previously unknown to the city and SCLAA, are included in their filing, we believe we will be able to completely and successfully defend the actions.”
KND denied the SEC charges, stating that the firm acted properly in both its initial financing capacity and its subsequent work managing the project. “No ‘fees’ were paid by SCLAA to KND,” KND said in a release. “KND retained no portion of this money.”
The actual property valuation did not come until after the 2008 bonds were issued, KD said. “KND is proud of its role in the hangar project and believes the SEC allegations to be without merit and is anxious to prove its position in court,” it wrote in the release.
The SEC is seeking the return of unspecified amounts of ill-gotten gains with prejudgment interest, financial penalties, and permanent injunctions against all of the defendants, as well as the return of ill-gotten gains from relief defendant KND Holdings, the parent company of KND.