Victorville Taps Top Tier Criminal Defense Attorney To Deal With SEC

(April 26) VICTORVILLE—The city of Victorville has retained the services of the Arent Fox law firm to represent it with regard to further investigation and potential legal action by the Securities and Exchange Commission.
The city, its city council, its former redevelopment agency, its city attorney and some of its employees, contractors and consultants have been under the Securities and Exchange Commission’s scrutiny for nearly three years.
At the basis of that investigation are questions as to whether the city, its former redevelopment agency, its airport authority and its rail authority diverted bond money from the stated purposes for which those bonds were issued to other programs, whether city attorney/redevelopment agency attorney Andre de Bortnowsky purposefully misled investors with regard to the actual and eventual use of the bond money, whether documentation created by the city implicates city officials individually or collectively in fraud, and whether conflicts of interest existed with regard to the various outside entities, i.e., contractors and consultants, whose actions and representations formed the basis for the expenditure of at least a portion of the bond money.
What was described in June of 2010 as a “non-public, fact-finding inquiry” relating to less than $40 million in bonds issued by the city mushroomed, in August 2010, into a full-blown investigation on how the city had spent some $480 million received from bond offerings. At that point in the investigation, the  Securities & Exchange Commission (SEC) obtained subpoenas for over 77,000 pages of documentation on how the city marketed its bonds and then spent those bond proceeds. By February 2012, the scope of the investigation had extended to $700 million worth of bonds issued by the city and its redevelopment agency, involving subpoenas for another 40,000 documents.
Federal investigators and an auditing firm hired by the city four years ago, Mayer Hoffman McCann, have documented that proceeds from bonds issued for redevelopment purposes as well as the civilian makeover of the former George Air Force Base into the Southern California Logistics Airport were diverted to other purposes.
An audit by Mayer Hoffman McCann begun in 2007 but not released until March of 2011 indicated “substantial doubt about the city’s ability to continue as a going concern.”  Mayer Hoffman McCann questioned whether Victorville can remain solvent, and uncovered tens of millions of dollars in internal loans that were never approved, three funds that were $180 million in the hole and dwindling cash reserves. Mayer Hoffman McCann said that as of March 2011 the city’s utility fund was $78 million upside down and that cash in the water district had dropped from $15 million in 2009 to $8 million as of June 30, 2010, despite a $20 million loan made to the district from the Southern California Logistics Airport Authority.
In 2004, the city earnestly set about to construct the 14-megawatt capacity Foxborough Power Station on east Nisquali Road, committing to completing the project on a $22 million budget, consisting of money to be appropriated out of the redevelopment agency’s operating fund. The intent was to generate electricity that would bypass the state power grid and be sold directly to businesses setting up shop in the Foxborough Industrial Park. The project failed to meet its April 2006 target opening date and in October 2006 the price tag for the project had escalated to over $54 million. Further construction delays ensued and with state mandated changes to the project that resulted in already purchased gas-fired combustion turbines being jettisoned for even more costly generators capable of running on biodiesel, its cost shot up further. In 2007, the city began borrowing from its general fund to shore up the project and then, as quietly as it could get away with, issued $90 million in bonds to cover the entire cost of Foxborough.
In April 2008, after all of the bond money had been eaten up by the Foxborough power plant project and another $5 million beyond that was consumed, city officials declared their intention to connect the plant to the state power grid, in absolute contravention to the original concept for the plant, which was to bypass the grid and thereby avoid the surcharge the state levies on electricity carried over its system so that low-cost energy could be sold to manufacturers to attract industry and jobs to the city’s industrial parks. Ultimately, the city failed to see that project through to fruition and the city council abandoned it altogether after having sunk $126 million into it.
More than $80 million of the $300 million in outstanding bonds floated specifically for airport operations actually funded city of Victorville operations or projects off Southern California Logistics Airport property, including $1.8 million utilized to acquire land for a city library. According to Mayer Hoffman McCann, at least $21.8 million was not spent in accordance with the bond covenants. Other airport money was used to further work on a 563-megawatt power plant the city was pursuing. The city also loaned $20 million in 2007 airport bond proceeds to the water district to help build a wastewater treatment plant. Those expenditures were made without informing or getting the consent of the bonds’ insurer, Radian.
By 2011, the Southern California Logistics Airport Authority (SCLAA) had accumulated debt of $102 million, twice the burden it had in 2009-10.
One issue repeatedly raised by Mayer Hoffman McCann was that staff had not properly documented and sought city council approval for its numerous interfund loans. The city had nearly $90 million in outstanding interfund loans as of June 2010. But only $30 million in loans had been formally approved by the council, according to the audit report.
Mayer Hoffman McCann reported staff did not properly document $20 million loaned between the city’s development impact fee funds, representing the city’s road developer impact fee account as having more than $20 million cash when essentially all of that money was spent through the public buildings developer impact fee account to carry out construction at City Hall and the Green Tree Clubhouse. When SCLAA ended 2009-10 with an $11 million cash overdraft, Victorville brought the cash balance to zero by borrowing money “for a term greater than one year” from its solid waste, rail authority and storm drain and street lighting funds, according to Mayer Hoffman McCann. The city’s redevelopment authority, which was decommissioned by state action in 2011, also loaned the airport more than $11 million to keep that enterprise going.
On December 1, 2011 a $10.6 million interest and principal payment on eight separate bond issuances made between 2005 and 2008 came due. The city defaulted on that payment.
On July 1, 2012, the San Bernardino County Grand Jury, after investigating Victorville’s operations for three years running, delivered a report indicating Victorville violated state laws transferring redevelopment money and property taxes dedicated to its sanitation department to its general fund budget, while squandering at least $116 million on never-realized efforts to develop electrical generating projects since 2005.
Initially, city attorney Andre de Bortnowsky, who characterized the SEC investigation as “a fishing expedition,” assumed a primary role in dealing with the Securities & Exchange Commission. Based upon the SEC’s examination of subpoenaed documents as well as interviews with city officials, de Bortnowsky has become a focus of the investigation. At issue is action taken by the city upon his advice as city attorney as well as while acting in his capacity of counsel for the redevelopment agency and Southern California Logistics Airport Authority. Investigators are examining very closely several conflicts of interest that existed as a consequence of de Bornowsky acting in the dual and triple capacities of city attorney, redevelopment attorney and bond counsel. According to information provided to the Sentinel by those with knowledge of the SEC investigation, employees with Mayer Hoffman McCann as well as with Kinsell, Newcomb & De Dios, a Carlsbad, California–based firm which provided bond-issuing assistance and underwriting to Victorville related to several of its bond transactions throughout the 2000s, provided information to both the FBI and Securities & Exchange Commission which has made de Bortnowsky’s continued representation of Victorville before the SEC untenable.
Accordingly, the city has now retained Los Angeles-based Arent Fox to handle any further interchanges between city officials and SEC investigators prior to the filing of any actual enforcement action against Victorville or its officials, including de Bortnowsky.  Arent Fox has assigned one of its partners, Terree Bowers, to the Victorville matter. Bowers, the former U.S. Attorney for the Central District of California, heads Arent Fox’s national white collar crime unit.
Arent Fox has represented a number of public officials or high profile personages in San Bernardino County who have had legal challenges in the form of being subject to criminal or procedural investigations or criminal charges filed against them. Arent Fox represented former Upland police chief Steve Adams when he was on extended leave from his position and questions were swirling about him over his alleged hiding of a police report pertaining to alleged criminal action by then-Upland city manager Robb Quincey. Adams retired, retaining his full pension and benefits. Arent Fox now represents Quincey, against whom the San Bernardino County District Attorney’s Office has filed felony misappropriation of public funds, gaining personal benefit from an official contract, and perjury charges. Arent Fox also represents Rancho Cucamonga developer Jeff Burum, who is accused by the county district attorney and state attorney general with conspiracy and abetting former San Bernardino County supervisors Bill Postmus and Paul Biane in the receipt of bribes.
While with the U.S. Attorney’s Office, Bowers created and led the Financial Institutions Fraud Task Force for the Los Angeles area.

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