WASHINGTON – The mayor of Harvey, Ill. has agreed to pay $10,000 and to never participate in a municipal bond offering again in order to settle charges with the Securities and Exchange Commission that he helped the city mislead bond investors by diverting proceeds from projects for which they were intended.
The SEC alleged that Mayor Eric Kellogg was connected to the fraudulent bond offerings because he exercised control over Harvey's operations and signed important offering documents that the city used to offer and sell the bonds. He is liable for fraud as a control person under Section 20(a) of the Securities Exchange Act of 1934, the SEC said.
Kellogg agreed to settle the charges without admitting or denying them.
"Investors were told one thing while the city did another, and Kellogg was in a position to control the bond issuances and prevent any fraudulent use of investor money," said LeeAnn Ghazil Guant, chief of the SEC enforcement division's public finance abuse unit. "His days of participating in muni bond offerings are over."
The fraud charges stem from three municipal bond offerings in 2008, 2009, and 2010 that totaled roughly $14 million and were meant to finance the development and construction of a Holiday Inn Hotel in the city. The bonds were not general obligation bonds and were meant to be repaid from dedicated tax revenue streams like Harvey's hotel-motel tax and sales tax or incremental tax from the Harvey Tax Increment District where the hotel project is located.
According to the 2008 official statement, the Holiday Inn would have 239 rooms, a restaurant and lounge, an indoor pool, and 10,500 square feet of meeting space.
The SEC wrote in its complaint it was imperative for the funds to be used to actually build the hotel because the funds to repay the bonds were derived from tax revenues that would be materially affected by the existence of the hotel.
However, the SEC found that Harvey officials diverted at least $1.7 million of bond proceeds from the three offerings into the city's general operation accounts to pay its operation costs, including payroll. The city's former comptroller Joseph Letke also received about $290,000 in undisclosed payments from the bond proceeds and others meant for the development project.
A federal judge fined and barred Letke from future municipal offerings last year.
The SEC said that Harvey engaged in a scheme to cover up the diversion of proceeds from investors and that Kellogg, as the signatory of on behalf of Harvey for important offering documents related to that scheme, was a control person. Kellogg also appointed and supervised Letke while the comptroller was working with the city.
As a result of the scheme, the hotel redevelopment project has turned into a "fiasco," the SEC said. The planned Holiday Inn and conference center stand as an "unfinished decrepit shell," according to local media reports.
The commission brought a lawsuit against the city of Harvey and Letke in June 2014 alleging violations of federal securities laws against fraud. A judge in the U.S. District for the Northern District of Illinois permanently enjoined Harvey from committing future fraud violations in December 2014 and then entered the judgment against Letke in January 2015.
The case was also unique in that the SEC sought and received an emergency court order to halt a municipal bond offering when it became clear that Harvey intended to issue more bonds while the SEC was conducting its investigation of the scheme.
Additionally, the impoverished city appears to have initially made debt service payments owed last December on a $37 million new money and refunding general obligation issue from 2007, but then pulled back the payments. The city has not reported the status of the payments to the Municipal Securities Rulemaking Board's EMMA site. It also has not filed updated financial information since 2014.