UPDATE 2-SEC says California city defrauded bond investors

Mon Apr 29, 2013 6:13pm EDT

SAN FRANCISCO, April 29 (Reuters) - U.S. securities authorities accused the city of Victorville, California on Monday of defrauding bond investors by inflating the value of the property used to secure a 2008 bond sale.

The Securities and Exchange Commission also charged an airport authority controlled by Victorville, a city official and the underwriter Kinsell, Newcomb & De Dios, saying it misused more than $2.7 million of bond proceeds to "keep itself afloat."

The bonds were issued to refinance debt for airport hangar construction and other redevelopment projects, according to the SEC, which filed its complaint in the U.S. District Court for the Central District of California.

The SEC is seeking the return of ill-gotten gains and other penalties from all defendants.

The airport authority initially financed building four airplane hangars on a former Air Force base and the other projects with tax increment bonds, according to the SEC. The debt is repaid by property-tax increases.

The authority partly refinanced the debt in 2008 and based the principal of new bonds on a $65 million valuation of the hangars determined by the underwriters. The county assessor, though, valued the hangars at less than half the amount, the SEC said.

The higher amount allowed to the authority to issue more bonds and also gave bond buyers false information about the security of being repaid, the SEC said.

About $55 million in airport authority debt issued in 2007 and 2008 is currently in default, and as of this month traded at roughly 45 cents on the dollar, the regulator said.

Kinsell, Newcomb & De Dios (KND)and its law firm were not immediately available for comment on the SEC's suit.

Victorville officials could not immediately comment on the complaint which they said they had not seen, city spokeswoman Monica Peterson said.

But in a statement she said unless there SEC has new evidence, "we believe we will be able to completely and successfully defend the actions."

A lawyer for both Victorville and the Southern California Logistics Airport Authority, Terree Bowers, said, "We respectfully disagree with the SEC's allegations as we understand them and we intend to vigorously fight this case."

According to the SEC complaint, "misstatements and omissions in the Official Statements for the Authority's bonds from November 2006 through April 2008 were material because a reasonable investor would want to know about an undisclosed financial arrangement" involving the underwriter.

"These misstatements and omissions were also material to the Authority because such fees increased the costs of issuing the bonds," the complaint added.

Bowers disputed how the SEC's complaint characterized omissions in official bond statements. "Sometimes, there are omissions that have no impact on the bond offering," he told Reuters. "For them to be actionable they have to be material."

The SEC's complaint identified the entity as KND Affiliates LLC and described it as partially owned by the underwriter and used to manage bond-financed work at the airport.

KND Affiliates "exploited" a fee arrangement for its services to pay itself at least $450,000 more in fees than it was owed and misappropriated $2.3 million of bond proceeds through a fictitious 15 percent monthly "property management fee," the SEC said.

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