SEC CHARGES ALLEN PARK, MICHIGAN WITH FRAUD INVOLVING MUNICIPAL BOND OFFERING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
November 6, 2014

The Securities and Exchange Commission announced fraud charges against the City of Allen Park, Mich., and two former city leaders in connection with a municipal bond offering to support a movie studio project within the city.

An SEC investigation found that offering documents provided to investors during the Detroit suburb’s sale of $31 million in general obligation bonds contained false and misleading statements about the scope and viability of the movie studio project as well as Allen Park’s overall financial condition and its ability to service the bond debt.

The city and the two officials – former mayor Gary Burtka and former city administrator Eric Waidelich – have agreed to settle the SEC’s charges.

“Municipal bond disclosures must provide investors with an accurate portrayal of a project’s prospects and the municipality’s ability to repay those who invest,” said Andrew J. Ceresney, Director of the SEC Enforcement Division.  “Allen Park solicited investors with an unrealistic and untruthful pitch, and used outdated budget information in offering documents to avoid revealing its budget deficit.”

The SEC alleges that Burtka was an active champion of the project and in a position to control the actions of the city and Waidelich with respect to the fraudulent bond issuances.  Based on this control, the SEC charged Burtka with liability for violations committed by the city and Waidelich.  This is the first time the SEC has charged a municipal official under a federal statute that provides for “control person” liability.  Burtka has agreed to pay a $10,000 penalty.

“When a municipal official like Burtka controls the activities of others who engage in fraud, we won’t hesitate to use every legal avenue available to us in order to hold those officials accountable,” said LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit.

According to the SEC’s administrative order against Allen Park and its complaints against Burtka and Waidelich filed in federal court in Detroit, the city began planning the studio project in late 2008 with the belief it would bring much-needed economic development.  The state of Michigan had just enacted legislation that provided significant tax credits to film studios conducting business in Michigan.  The original plan detailed a $146 million facility with eight sound stages led by a Hollywood executive director, and the city initially planned to repay investors with $1.6 million in revenue from leases at the site.  Allen Park issued bonds on Nov. 12, 2009, and June 16, 2010, to raise funds to help develop the site.

The SEC’s order finds, however, that by the time the bonds were issued, Allen Park’s plans to implement and pay for the studio project had deteriorated into merely building and operating a vocational school on the site.  Yet none of these plan changes were reflected in the bond offering documents or other public statements, which continued to repeat the original plans for the movie studio project.  Investors were left uninformed not only about the deterioration of the project itself, but also the substantial impact it would have on the city’s ability to service the bond debt.  Without the planned revenues from the studio project, the expected annual debt payments on the bonds represented approximately 10 percent of the city’s total budget.  Furthermore, Allen Park used outdated budget information in the bond offering documents that did not reflect the city’s budget deficit of at least $2 million for fiscal year 2010.  The studio project completely collapsed within months after the second set of bonds were issued, and Michigan appointed an emergency manager for Allen Park in October 2010 while citing the failed project as a primary factor in the city’s deteriorating economic condition.

The SEC’s complaints allege that Waidelich as city administrator reviewed and approved the offering documents for the bonds.  Waidelich’s actions violated Section 17(a)(2) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b).  Without admitting or denying the allegations, Waidelich has consented to a final judgment barring him from participating in any municipal bond offerings and enjoining him from future violations.  The SEC alleges that Burtka is liable as a control person under Section 20(a) of the Exchange Act, based on his control of Waidelich and the city.  Without admitting or denying the allegations, Burtka consented to a final judgment requiring him to pay the $10,000 penalty, barring him from participating in any municipal bond offerings, and enjoining him from future violations.

The SEC’s order against Allen Park finds it violated Section 17(a)(2) of the Securities Act and Section 10 (b) of the Securities Exchange Act and Rule 10b-5(b).  The city agreed to cease and desist from future violations of those provisions.  The SEC considered certain remedial measures taken by the city, which settled the enforcement action without admitting or denying the findings.

The SEC’s investigation was conducted by Sally J. Hewitt of the Municipal Securities and Public Pensions Unit with assistance from John E. Birkenheier, John E. Kustusch, and Jean M. Javorski in the SEC’s Chicago Regional Office and Mark R. Zehner, Deputy Chief of the Municipal Securities and Public Pensions Unit.

SEC CHARGES CHARTER SCHOOL OPERATOR WITH DEFRAUDING INVESTORS IN $37.5 MILLION BOND OFFERING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission charged a charter school operator in Chicago with defrauding investors in a $37.5 million bond offering for school construction by making materially misleading statements about transactions that presented a conflict of interest.

The SEC alleges that UNO Charter School Network Inc. and United Neighborhood Organization of Chicago not only failed to disclose a multi-million-dollar contract with a windows company owned by the brother of one of its senior officers, but investors also weren’t informed about the potential financial impact the conflicted transaction had on its ability to repay the bonds.

UNO is settling the SEC’s charges by agreeing to undertakings to improve its internal procedures and training, including the appointment of an independent monitor.

“UNO misled its bond investors by assuring them it had reported conflicts of interest in connection with state grants when in fact it had not,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “Investors had a right to know that UNO’s transactions with related persons jeopardized its ability to pay its bonds because they placed the grant money that was primarily funding the projects at risk.”

According to the SEC’s complaint filed in federal court in Chicago, UNO entered into two grant agreements with the Illinois Department of Commerce and Economic Opportunity (IDCEO) in 2010 and 2011 to build three schools.  Each grant agreement contained a provision requiring UNO to certify that no conflict of interest existed when it signed the agreements.  UNO was required to immediately notify IDCEO in writing if any actual or potential conflicts subsequently arose.  If UNO breached this conflict of interest provision, IDCEO could suspend the payment of grants and recover grant funds already paid to UNO.

According to the SEC’s complaint, UNO breached the conflict of interest provision as it entered the construction phases of the project in 2011 and 2012.  UNO contracted two companies owned by brothers of its chief operating officer.  UNO agreed to pay one company approximately $11 million to supply and install windows and the other company approximately $1.9 million to serve as an owner’s representative during construction.  UNO did not advise IDCEO in writing about either of those conflicted transactions.

The SEC alleges that when UNO conducted its $37.5 million bond offering in October 2011, it issued an official statement to investors in bond offering documents that devoted an entire subsection to the subject of conflicts of interest.  UNO affirmatively assured investors that its conflicts policy was more robust than required for non-profit organizations.  UNO did disclose the contract with the company serving as owner’s representative, which was owned by the chief operating officer’s brother – who was a former UNO board member himself.

The SEC alleges that UNO nonetheless failed to disclose its much larger transactions with the windows company owned by another brother of the chief operating officer.  Moreover, nothing in the official statement disclosed that UNO already was in breach of the conflict of interest provision in its June 2010 grant agreement with the IDCEO because it already had transacted with both companies without advising the agency in writing about those engagements.  UNO also failed to disclose in the official statement that IDCEO could recoup all of the grant money as a result of this breach of the conflicts of interest provision.  Had IDCEO exercised its rights under the grant agreements and recouped the entire amount of the grants, UNO would not have had the cash to repay the grants and therefore would have had to liquidate its charter schools – the very revenue-producing assets essential for repayment of the bonds.

“Conflicted transactions and self-dealing by issuer officials can be material information for municipal bond investors and should be given appropriate focus by issuers and underwriters in disclosure documents,” said LeeAnn Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit.  “Failing to disclose material information undermines investor confidence in the municipal securities market and places at risk an important source of funding for local government projects.”

The SEC complaint charges UNO with violations of Section 17(a)(2) of the Securities Act of 1933.  UNO neither admitted nor denied the charges in the settlement.

The SEC’s investigation is continuing.  It has been conducted jointly by staff in the Chicago Regional Office and the Municipal Securities and Public Pensions Unit, including Michael Mueller, Eric Celauro, and Michael Foster.  The case is being supervised by Peter K.M. Chan.

RUSSIAN BANK PRESIDENT ORDERED BY CFTC TO PAY $250,000 TO SETTLE FALSE STATEMENT CHARGES

FROM:   COMMODITY FUTURES TRADING COMMISSION 

January 2, 2014

CFTC Orders President of a Russian Bank, Artem Obolensky, to Pay $250,000 Penalty to Settle Charges of Making False Statements to the CFTC During an Investigation

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today entered an Order requiring foreign national Artem Obolensky of Moscow, Russia, to pay a $250,000 civil monetary penalty for making false and misleading statements of material fact to CFTC staff in an interview during a CFTC Division of Enforcement investigation. The Order enforces the false statements provision of the Commodity Exchange Act (CEA), which was added by the Dodd-Frank Act.

Obolensky is President of a Russian bank and co-owner of a private investment fund located in Cyprus that both trade foreign currency futures and options on the Chicago Mercantile Exchange, according to the Order. The CFTC Order finds that Obolensky knowingly made false and misleading statements to CFTC staff on October 13, 2011, regarding a trade in March 2012 Japanese Yen call options contracts between these entities.

According to the Order, Obolensky said: “The two entities pursue different strategies. Pure coincidence that the trades crossed. Very isolated when viewed in the context of all of the trades the bank has placed in markets over the years.”

However, the Order finds that the two entities traded opposite each other more than 182 times and modified their orders repeatedly to ensure that they would match. The Order also finds that Obolensky made the trading decisions for the accounts that traded opposite each other so he knew that the trade CFTC staff asked him about was not a “pure coincidence” or “very isolated.”

CFTC Division of Enforcement Acting Director Gretchen Lowe commented: “Witnesses in CFTC investigations must tell the truth. If they do not, the CFTC will not hesitate to take action to enforce the Dodd-Frank’s prohibition against providing false or misleading information and impose sanctions.”

In addition to the $250,000 civil monetary penalty, the CFTC Order requires Obolenksy to cease and desist from violating the relevant provision of the CEA.

The CFTC Division of Enforcement staff members responsible for this matter are Susan Gradman, Joseph Patrick, Scott Williamson, Rosemary Hollinger, and Richard B. Wagner.