by T. GormanPosted on Posted in SECActions

The City of Victorville California, Assistant City Manager Keith Metzler, deal underwriter and broker Newcomb & Dedios or KND and its principle Jeffrey Kinsell were named as defendants by the Commission in a suit alleging fraud in connection with the sale of municipal bonds. The city airport authority, Southern California Logistics Airport Authority, two executives at KND and an affiliate of the firm were also named as defendants. SEC v. City of Victorville, Case No. EDCV 13-776 (C.D. Cal. Filed April 29, 2013).

Over a two year period beginning in 2006 the Airport Authority, created to redevelop a 132 acre tract of land around a former Air Force base, offered and sold at least four tax increment financings. In each instance investors were provided with an Official Statement describing the terms and conditions of the offering. KND was the underwriter for each offering.

The tax increment bonds were secured by, and repaid from, increases in property tax revenues. Those increases were tied to the total assessed value of the property in the redevelopment project area. Key to the value of the bonds and the security for investors was the increase in tax revenue from the valuations of the property and the overall debt service ratio.

The bond offerings were used to finance the construction of a power plant and four new hangers on the Air Force base along with what the complaint describes as “a number of ill-conceived redevelopment projects.” By the second year of the program an additional $50 million was needed for the power plant. The Airport Authority sought to raise the money in a new $68 million financing. In view of market conditions, however, only $42 million was raised.

In the spring of 2008 the Airport Authority raised an additional $13.3 million in an offering of tax increment bonds. The proceeds were intended to repay part of an earlier short term loan. The offering was collateralized by the hangers, valued at $65 million. At the time City Development Director Metzler, KND owner Jeffrey Kinsell and one of the firm’s employees knew that the value for the hangers was inflated, according to the SEC. That fact was not disclosed to investors.

Mr. Kinsell and KND also defrauded the city with respect to the fees charged, according to the complaint. While those should have been on a cost plus basis, they took $450,000 that was not owed. They also charged $2.3 million in so-called “fictitious” property management fees, thus effectively misappropriating about $2.7 million.

The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15B(c)(1). The case is in litigation. See also Lit. Rel. No. 22690 (April 29, 2013).

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by T. GormanPosted on Posted in SECActions

The Commission prevailed on a motion for summary judgment against a brokerage firm, its principle and a former managing director, ultimately securing judgments of over $2.7 million. SEC v. Constantin, Civil Action No. 11-CV-4642 (S.D.N.Y. Filed July 6, 2011). This is one of what may be an increasing number of actions involving brokers and market professionals defrauding their clients.

The Constantin case was brought against Windham Securities, its owner and principal Joshua Constantin, and former firm managing director Brian Solomon. The complaint centers on an alleged fraud in connection with a private placement. Specifically, the defendants raised more than $1.1 million for investors in Leeward Group, Inc, a company that was suppose to be going public. Rather than invest the money as represented to investors, it was funneled in part to other entities and diverted to personal use. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 20(a).

In July 2012 the Commission moved for summary judgment as to each defendant. Subsequently the Court granted the motion, concluding that there was no material dispute of fact and ruling in the SEC’s favor. The Court found that the defendants made a series of misrepresentations in connection with the sale of the shares. Mr. Constantin diverted investor funds to his own purpose, according to the Court. In an effort to conceal the wrongful conduct, Messrs. Constantin and Solomon furnished misleading documents to the investors.

The Court entered judgments of permanent injunction against each defendant, prohibiting future violations of the Sections cited in the complaint. In addition the Court directed Mr. Constantin and Windham Securities pay, on a joint and several basis, $2.49 million in disgorgement, prejudgment interest and penalties. Mr. Solomon was directed to pay $249,000 in disgorgement, prejudgment interest and penalties. A supplemental order requires the defendants, along with two relief defendants, to pay $2.74 million in disgorgement, prejudgment interest and civil penalties on a joint and several basis. See also Lit. Rel. No. 22656 (April 24, 2013).

Earlier this year the Commission brought an action against a brokerage firm, its principal and others for defrauding clients. In the Matter of John Thomas Capital Management Group LLC, Adm. Proc. File No. 3-15255 (March 22, 2013) names as Respondents George Jarkesy, Jr., his management company, John Thomas Capital Management Group LLC, Anastasios “Tommy” Belesis, and the brokerage he founded, John Thomas Financial, Inc. The Order there focused on two key claims. One alleged misrepresentations regarding portfolio values and the other false statements to investors.

The claim regarding portfolio values centers on JT Capital which managed two funds. Although investors received monthly statements showing the value of their holdings, key assets were not valued in accord with the representations made to investors. Rather, Mr. Jarkesy assigned them arbitrary values which increased the amount of the portfolio and the management fees. The offering materials had similar misrepresentations regarding the role of Respondent Belesis, the millions of dollars paid to JT Financial and even the identity of the outside auditors. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). This case will be set for hearing. Subsequently, FINRA brought a proceeding against the firm and its principle alleging trading ahead, failure to obtain best execution and intimidation. That action will also be set for hearing.

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