Detroit Suburb Charged with Muni Bond Fraud

The U.S. Securities and Exchange Commission is charging the Detroit, Michigan suburb of Allen Park with fraud involving a municipal bond sale that was supposed to finance a movie studio project. Also charged with municipal bond fraud are ex-city Mayor Gary Burtka and former City Administrator Eric Waidelich. All three settled without denying or admitting to the charges.

The Commission contends that Allen Park took advantage of a 2008 Michigan law giving substantial tax credits to film studios that engage in business in the state. The $147 million movie studio, called Unity Studios, was supposed to give jobs to thousands. The plan, however, failed when the city was unable to keep up its end of the partnership.

Because of the project, Allen Park ended up with a $2 million budget deficit. The regulator says that the studio became a “primary factor” in the failing economic health of the city. A vocational school was constructed on the site instead.

Despite the problems, however, the city failed to tell investors about the difficulties in meeting debt service payments, revenue instabilities, and the budget deficit, which were not mentioned in bond documents. Investors also weren’t purportedly notified of the toll the failing project would have on the city’s ability to pay back the debt.

According to the regulator, offering documents for issues of $31 million in general obligation bonds for 2009 and 2010 included misleading and false statements about plans to set up a movie studio and the city’s failing financial health. Because of this, said SEC enforcement division director Andrew Ceresney in a statement, Allen Park provided investors they solicited with a pitch that was not truthful or realistic and included dated budget data in offering documents to get around disclosing “its budget deficit.”

As part of the settlement, Burtka is barred from bond issuances and has to pay $10,000. Waidelich is also barred from muni bond offerings in the future. Allen Park consented to cease and desist from future violations.

Meantime, a federal judge is expected to decide whether Michigan’s biggest city—Detroit—can now exit bankruptcy protection. U.S. Bankruptcy Judge Steven Rhodes will likely approve the exit. However, he has to determine first if Detroit’s restructuring plan is doable, equitable to creditors, and fair. The plan gets rid of $7 billion in debt, cuts pensions to over 20,000 retirees, and resolves claims of over $2 billion with big Wall Street Creditors.

Last week, U.S. Bankruptcy Judge Christopher Klein ruled that the California city of Stockton is now ready to exit bankruptcy protection. He approved the city’s reorganization plan, which cuts payments to bondholders and ups taxes. Stockton had filed for bankruptcy after getting hit hard during the housing market collapse. Two Franklin Templeton Investments-managed funds had protested allowing the plan’s approval. The funds underwrote the bonds for the city’s parks and fire stations.

Please contact our muni bond fraud lawyers if you suspect that your losses are due to negligence or misconduct.

SEC charges Michigan city with fraud over municipal bond sale, Reuters, November 6, 2014

Judge Approves California City’s Bankruptcy-Exit Plan, Wall Street Journal, October 30, 2014

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