Judge Denies Motion To Jettison SEC Fraud Case Against Victorville

(November 21)  U.S. District Judge John  Kronstadt on November 14 denied defense motions to dismiss the Securities and Exchange Commission’s charges that the city of Victorville, its airport authority and assistant city manager Keith Metzler defrauded investors with a 2008 municipal bond offering.
On April 29 the Securities and Exchange Commission (SEC) filed a suit against Victorville, the Southern California Logistics Airport Authority  and Metzler, who in addition to his role as assistant city manager is also the executive director of the airport authority. In its complaint, the SEC alleges those entities made misrepresentations to the purchasers of bonds, the proceeds from which were intended to assist in the development of Southern California Logistics Airport.
The airport authority was formed by the city of Victorville to facilitate the conversion of the former George Air Force Base, which was shuttered by the Department of Defense in 1992, into a civilian airport. The Southern California Logistics Airport Authority, which has as its board of directors all five members of the Victorville City Council, issued bonds which were sold to investors to generate revenue to be used in making the base’s civilian use conversion.
Fundamental to the SEC complaint is the allegation that the defendants made misrepresentations with regard to the value of four airport hangars that Victorville referenced in its official statement for an April 2008 bond offering. The value of all four hangars was listed at $65 million. The county assessor later valued the hangars at $27.7 million. The SEC alleges that the authority used the inflated estimated values to mislead bond investors.
Two separate responses to the SEC complaint  were filed on August 30, one from attorneys with the law firm of Arent Fox, which represents Victorville and the airport authority and another from the law firm of Orrick, Herrington & Sutcliffe, representing Metzler. Those responses augmented a joint motion filed by Arent Fox and Orrick Herrington & Sutcliffe June 12 to dismiss the claims against their defendants.
Also charged in the SEC’s April complaint were  Kinsell, Newcomb & DeDios Inc., the underwriter for the bond offerings, that company’s owner, Jeffrey Kinsell, and Kinsell, Newcomb and DeDios investment banker Janees Williams.
The SEC complaint consists of nine claims for relief and one prayer for disgorgement. The authority is named in the first two claims for relief. Kinsell, Newcomb and DeDios [KND] is named in the third, fourth and eighth claims for relief. KND and Jeffrey Kinsell are named in the fifth and sixth claims for relief. Victorville, Jeffrey Kinsell, Williams and Metzler are named in the seventh claim for relief.  Jeffrey Kinsell and Williams are named in the ninth claim for relief.
In the prayer for disgorgement, which is a request for restitution of ill-gotten profits from security law violators, all the parties are named.
The responses filed August 30 pertain only to the city, the airport authority and Metzler. Lawyers for those defendants and the SEC presented verbal arguments to Kronstadt at a hearing October 28.
Orrick, Herrington & Sutcliffe maintain Metzler should not have been included in the case in that he twice provided correct information to KND prior to the bond sale about the true value of the hangars and that responsibility for any misrepresentations with regard to the value of the assets securing the bonds fell to the bond underwriters.
Arent Fox maintains that even if the hangar valuations were overstated, they were not material misrepresentations by which the financing of the bonds in terms of the city’s and airport authority’s ability to continue to make payments to the bondholders was threatened. At no time did the actual debt service ratio between the bonds and the assets securing them fall below the SEC’s own standard of 1.25, Arent Fox maintains, exonerating the city and the airport authority.
Kronstadt on November 14 ruled that the combined defenses’ overall rationale for dismissing the case against the three defendants was “unpersuasive,” and that the bulk of the matter should go forward. The judge did, however, make a determination that the SEC has not yet presented any convincing evidence to show the defendants improperly gained from their alleged misconduct, which is the basis of the SEC’s request for disgorgement. “Given that the SEC has engaged in a three year investigation into this matter, its decision to present no allegations support[ing] of the request for disgorgement is significant and telling,” Kronstadt found in dismissing that portion of the case against Victorville, the authority and Metzler.
Trial on the case will not begin until late 2014 or late winter 2015.

Leave a Reply