Municipal bond underwriter Pacific Genesis Group Inc. agreed to settle charges brought by state regulators that it defrauded investors by failing to disclose the risks of tax-exempt municipal bonds that helped finance speculative real estate deals, officials said Thursday.
Under terms of the agreement, San Francisco-based Pacific Genesis Group agreed to market its land-backed bonds only to suitable investors and disclose risks connected with the transactions. The firm, which didn't admit or deny any wrongdoing, also agreed to pay $250,000 in state legal and investigative costs.
Pacific Genesis has been investigated by the California Department of Corporations for more than two years for its sale of municipal bonds backed by golf courses, shopping malls and other land development projects. Among other charges, the department accused the firm of operating a Ponzi scheme--paying off old investors with money from new investors--in a suit filed in November 1997.
The settlement included an order that the firm "desist and refrain" from offering bonds in violation of California's anti-fraud laws. If found in violation, it means fines of $300,000.
"It's an order from the commissioner saying I think you've done it and stop doing it," said Bill McDonald, chief investigator for the Department of Corporations. "It gives us a hair-trigger that allows us to go back into court and get additional penalties" if the firm commits any violations in the future.
Pacific Genesis, which was barred from denying any of the allegations as part of the agreement, said in a statement that the litigation has cost it $750,000, in addition to the Department of Corporations reimbursement.
"We're glad to have this matter over and done with," said Mike Dillard, a lawyer representing Pacific Genesis. "We're very confident that there will be no difficulties in terms of honoring the settlement."
David Fitzgerald, head of the firm and a defendant in the state suit, declined to comment on the settlement.
In its suit, the department charged that the firm in its heyday marketed bonds to about 3,000 individual investors, many of whom didn't understand the risks of the nonrated bonds. That included investors who didn't realize they were purchasing revenue bonds for projects, not bonds backed by the full faith and credit of a municipality associated with a project.
Under California's Marks-Roos Local Bond Pooling Act, municipalities can join with others to form authorities to sell bonds, including for projects outside of the boundaries of the pool's members.
Pacific Genesis was ordered by a state judge in December 1997 to disclose its sales practices to an independent reviewer. The review ends with the settlement.
The Department of Corporations' suit against the firm was scheduled to go to trial this summer.