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SEC accuses city of Victorville, others of fraud in bond sale

April 30, 2013|By Marc Lifsher, Phil Willon and Ken Bensinger, Los Angeles Times
  • On Monday it got worse. The Securities and Exchange Commission accused the city, a key financial advisor and others of defrauding investors in a $13.3-million bond sale in 2008. Above, City Hall.
On Monday it got worse. The Securities and Exchange Commission accused… (James Quigg, AP )

Ever since the Department of Defense shut down George Air Force Base in 1992, the high desert town of Victorville has struggled to reinvent itself.

The city encouraged massive residential and retail development. It invested in two new power plants. And it moved to transform the shuttered base into a thriving cargo airport.

But those efforts have mostly backfired, creating financial headaches and scandal for the city of 115,000 residents, perched 90 miles from Los Angeles on the edge of the Mojave Desert.

On Monday it got worse. The Securities and Exchange Commission accused the city, a key financial advisor and others of defrauding investors in a $13.3-million bond sale in 2008.

The SEC alleged that Victorville, its Southern California Logistics Airport Authority, an assistant city manager and bond underwriter Kinsell, Newcomb & DeDios Inc. in Carlsbad dramatically overstated the value of airport hangars to raise needed funds through the bond offering.

The suit, filed Monday in U.S. District Court in Los Angeles, contends that the authority valued the properties at $65 million when the city, the authority and the underwriter knew they were worth less than half that amount. The complaint also alleged that the financial advisors never disclosed that they took $2.75 million in bond proceeds.

The federal agency alleged that the false information made it impossible for potential investors to make informed decisions about the risk of buying the bonds.

"Financing redevelopment projects by selling municipal bonds based on inflated valuations violates the public trust as well as the anti-fraud provisions of the federal securities laws," said George S. Canellos, co-director of the SEC enforcement division.

"Public officials have the same obligation as corporate officials to tell the truth to their investors," he said.

The once fast-growing high desert city and the airport authority plan to "vigorously fight the case," said Terree A. Bowers, a lawyer for Victorville. He dismissed as "technical" much of the fraud allegations.

"These actions are somewhat questionable given the city's emerging recovery from the Great Recession," said Bowers, a former U.S. attorney in Los Angeles. "It is certainly worth debating whether this lawsuit is in anyone's best interest."

The lawsuit comes at a pivotal time for Victorville. The city has been struggling to rebound from the recession and from such self-inflicted wounds as its ill-fated investment in a hybrid gas and solar power plant, defaults on bond payments and even a deficit-ridden municipal golf course.

The latest blow from the SEC, however, could crimp the city's borrowing efforts further, said former Victorville City Council member Terry Caldwell, who left the council in 2010.

"The SEC complaint is a cloud over the city, especially in the bond market if the city wants to sell bonds for future projects," he said.

Caldwell said the airport remains a crucial part of the city's future economic success. The authority has been trying to develop a 132-square-mile area on and around the old George Air Force Base as a logistics airport for cargo traffic and aircraft maintenance and storage.

In addition to the city, the authority and the underwriter, others named as defendants are KND Affiliates; J. Jeffrey Kinsell, president of Kinsell Newcomb; Janees L. Williams, vice president of Kinsell Newcomb; and Keith C. Metzler, assistant city manager of Victorville. KND Holdings Inc., parent company of KND Affiliates, also was named as a relief defendant.

The suit also alleged that KND Affiliates misappropriated bond proceeds it collected as construction and property management fees related to the building of airplane hangars. Kinsell, a half owner, "had no construction experience," the complaint said.

Lawyers for the bond underwriters and Metzler did not return telephone calls.

The crux of the government's allegations centered on the city's use of so-called tax-increment bonds to pay for a variety of developments. The projects included four hangars and a power plant.

Tax-increment bonds are not backed by the general treasury of the issuing government. Instead, they are secured and repaid from increases in property tax revenues that flow from the new value of improvements to the land, structures and real estate market conditions.

In early 2008, the airport authority borrowed $35 million in a private deal with a major bank, which the SEC wouldn't name. Soon after, the authority sold $13.3 million in bonds to pay off part of that debt. That sale was premised on the value of the four hangars, which the city, the authority and the underwriters said was $65 million, according to the SEC suit.

That amount, the SEC alleged, was "vastly inflated." The hangars were worth less than half that amount, roughly $28 million, according to the suit.

What's more, the suit claimed, the defendants "knew that the assessed value of hangars was inflated."

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