Articles Posted in Municipal Bonds

In its complaint, the US Securities and Exchange Commission has submitted a civil junctive action accusing Malachi Financial Products, Inc. and its principal Porter B. Bingham, of municipal bank fraud targeting Rolling Fork, Mississippi. According to the regulator, Malachi and Bingham charged the city too much for municipal advisory services involving a muni bond offering from October 2015.

Rolling Fork had hired Malachi in the capacity of municipal adviser in 2015 because of a proposed bond offering to pay for a number of improvement projects in the city. The SEC contends that after the closing of the offering, the firm and its principal submitted two invoices to the bond trustee, one—for $33,000—was for services that were never rendered and had never been authorized by the Mississippi city. The other, for $22K, was in line with what Malachi and Rolling Fork had agreed upon.

Bingham purportedly did not disclose to Rolling Fork that he had received $2,500 from Anthony Stovall, who worked for Bonwick Capital Partners. LLC, prior to Malachi recommending to the city that it retain Stovall’s firm as an underwriter for the bond offering. Rolling Fork went on to hire the underwriting firm because of the recommendation.

Continue reading

David Webb, the ex-Illinois mayor of the city of Markham, has agreed to partially resolve fraud charges brought by the SEC accusing him of involvement in a $5.5M municipal bond scam. The regulator accused Webb of taking part in a pay-to-play scheme that involved a $75K bribe from a construction contractor. In return, Webb is accused of directing one of the city’s construction projects to the contractor. The alleged fraud involved a $5.5 muni bond offering that the city offered in 2012.

According to the Commission’s complaint, at a Markham council meeting that year, talks took place to authorize the $5.5M of general obligation bonds to help pay for certain city projects. It was during this conversation that an attendee spoke out saying she’d heard that the owner of a roller rink stood to “improperly benefit.” The owner of the rink was Markham’s city attorney at the time and the roller ring was one of the city projects involved. Webb, however, responded by saying “I don’t make deals” even though he purportedly had recently been paid the bribe to the construction contractor. The regulator claims that the pay-to-play scam involving the city’s Roesner Park development project was already in place.

The bond offering was approved.

Continue reading

In the wake of Puerto Rico’s bankruptcy filing, hedge funds are competing with the U.S. territory’s workers to get paid. The island has guaranteed retirees and workers $49 Billion in benefits. However, the federally appointed oversight board expects that it will have to cut pension costs by 10%.

Even worse for bondholders, they could get less than 25% of what bondholders are owed. This is true even for bondholders with General Obligation debt, which was supposed to have been constitutionally guaranteed. Creditors that own COFINAs, Puerto Rico sales tax bonds, are being offered up to 58 cents on the dollar should the territory’s finances get better. Both sides will appear in federal court in San Juan Puerto Rico in an attempt to try to work out a deal.

It was just recently that Puerto Rico’s oversight board submitted for Title III bankruptcy protection to help lower Puerto Rico’s $74 Billion of debt and deal with the Commonwealth’s pension crisis. Under Title III, the island can make pension recipients accept reduced benefits.

Continue reading

In separate bond fraud lawsuits, two groups of municipal bond holders are suing Bank of Oklahoma Financial (BOKF), also called BOK Financial Corp. They claim that the bank was not a responsible trustee to certain conduit bondholders that were harmed by fraud.

The first securities lawsuit is a class action brought by eight plaintiffs in the U.S. District Court for the Northern District of Oklahoma. They are claiming a number of causes of action, including gross negligence, aiding and abetting fraud, breach of fiduciary duty, civil conspiracy, and aiding and abetting breach of fiduciary duty.They want a jury trial and over $5M in compensatory damages.

The second case includes 20 individuals and a company. All of them invested in conduit bonds. They brought their case in Tulsa District Court in Oklahoma and are asking for exemplary damages of up to $5M, as well as yet-to-be determined actual damages.

Continue reading

Port Authority Admits Wrongdoing Related to Failure to Disclose Bond Risks to Investors
The Port Authority of New Jersey and New York will pay a $400K to resolve Securities and Exchange Commission charges accusing the municipal issuer of knowing about the risks involved a number of NJ roadway projects yet failing to tell investors who bought the bonds that would pay for these projects about the risks. The Port Authority admitted wrongdoing.

According to the SEC’s order, the Port Authority sold $2.3B of bonds even though there were questions as to whether certain projects exceeded their mandate and might not be legal to execute. Despite these concerns, the Port Authority did not mention the risks in offering documents.

SEC Cases Seeks to Hold Companies Accountable for FCPA Violations
Already this year, the SEC has brought and/or settled a number of civil cases involving alleged violations of the Foreign Corrupt Practices Act. Early last month, Biomet, a medical device manufacturer, agreed to pay over $30M to settle parallel Justice department and SEC probes over purported repeat FCPA violations.

Continue reading

The Securities and Exchange Commission has settled its fraud case with two municipal advisory firms and their executives. They are accused of using deceptive practices when trying to solicit business from five school districts in California. The advisory firms, School Business Consulting Inc. and Keygent LLC, resolved the administrative proceedings without denying or admitting to the charges.

According to the regulator, School Business Consulting gave Keygent LLC confidential information that allowed it to win municipal advisory contracts from the school districts. School Business Consulting had advised districts about their process for hiring financial professionals.

The SEC said that without the district’s consent School Business Consulting shared the confidential information with Keygent, including questions asked in interviews with the districts and what competitor candidates were proposing and charging. The Commission believes that the unauthorized disclosure of this information gave Keygent an “improper advantage” over competitors.

Municipal entities are entitled to be able to trust that their choice of a municipal advisor is not blemished by any breach of fiduciary duty. As part of the settlement, School Business Consulting will pay a $30K penalty and it has consented to a censure. The company’s president, Terrance Bradley, was ordered to pay a $20K penalty and is barred from acting as a municipal advisor. Keygent is also censured and will pay a $100K penalty. Its principals, Chet Wang and Anthony Hsieh, will pay $20K and $30K penalties, respectively.

Continue reading

Mayor of Harvey, Illinois Barred From Future Involvement In Muni Bond Offerings
Eric J. Kellog, the mayor of Harvey, Illinois, will pay $10K to resolve the Securities and Exchange Commission’s case accusing him of municipal bond fraud. As part of the settlement, Kellog has agreed to never take part in a muni bond offering again.

According to the Commission, Mayor Kellogg was tied to a number of fraudulent bond offerings made by the city of Harvey. Investors thought their money would go toward building a Holiday Inn hotel when, instead, at least $1.7M in bond proceeds were diverted to cover the city’s payroll and pay for operational costs that had nothing to do with the hotel construction project.

Kellogg was in charge of Harvey’s operations. His signature was on key offering documents used by the city of Harvey to sell and offer the municipal bonds. The SEC said that the mayor was liable for fraud as a control person under the Securities Exchange Act.

By settling, Kellog is not denying or admitting to the SEC findings.

Ethiopia’s Electric Utility Pays Over $6M to Settle SEC Municipal Bond Case
In other bond fraud news, the SEC has reached a settlement with the Ethiopian Electric Power over charges that the foreign electric utility did not register the bonds that it sold and offered to U.S. residents who were of Ethiopian descent. EEP will pay almost $6.5M to resolve the case accusing it of violating U.S. securities laws.

Continue reading

Douglas MacFaddin and Charles LeCroy will pay $326,373 to settle SEC civil charges accusing them of paying friends of Jefferson County, Alabama officials $8.2M in return for $5B in county bond business. Together, the ex-J.P. Morgan Securities (JPM) executives will pay $326,373 once a district court judge approves the proposed settlements—that’s 4% of the $8.2M that was allegedly paid so that their firm could get the business.

Jefferson Count experienced financial woes when it borrowed funds so it could comply with a 1996 court order to stop sewer leaks from getting into area streams. Additional construction costs and bond swaps cost the project to exceed over $3B.

The Commission’s lawsuit had alleged violations of its law and rules. The regulator’s charges against the two men were resolved in mediation.

Continue reading

Closing arguments took place this week in the Federal Housing Finance Agency’s mortgage-backed securities lawsuit against Nomura Holdings Inc. (NMR). The U.S. regulator claims that the bank made false statements when selling some $2 billion in MBSs to Freddie Mac (FMCC) and Fannie Mae (FNMA).

A lawyer for the bank said that FHFA’s claimed losses were not the fault of Nomura or that of Royal Bank of Scotland (RBS), which the government is also pursuing over the securities. Instead, contended the attorney, market conditions during the 2008 economic crisis were to blame.

The is the first of 18 MBS fraud cases over about $200 million in securities that different banks sold to mortgage finance giants to go to trial. Already, FHFA has gotten $17.9 billion in settlements with the other financial firms, including JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), and Deutsche Bank AG (DB). There was just this case and the one against Royal Bank of Scotland remaining.

According to the Wall Street Journal, the U.S. Department of Justice has been meeting with ex-Moody’s Investor Service (MCO) executives to talk about the way the credit ratings agency rated complex securities prior to the 2008 financial crisis. Sources say that the probe is still in its early stages and it is not certain at the moment whether the government will end up filing a bond case against the credit rater.

DOJ officials are trying to find out whether the company compromised its standards in order to garner business. The government’s focus is on residential mortgage deals that took place between 2004 and 2007.

Moody’s and credit rating agency Standard and Poor’s gave triple A ratings to the deals so that even conservative investors were buying the subprime loan-backed securities. The investments later proved high risk. When the housing market failed, the bond losses cost investors billions of dollars.