VICTORVILLE (May 28)—The Securities and Exchange Commission has reasserted accusations that the city of Victorville and its assistant city manager improperly benefited from the sale of   municipal bonds in 2008.
In April 2013, the Securities and Exchange Commission (SEC) alleged that fraud was committed by the city of Victorville, the Southern California Logistics Airport Authority and Keith Metzler, who fills the dual roles of assistant city manager and executive director of the airport authority, when misrepresentations were allegedly made to the purchasers of bonds, the proceeds from which were intended to assist in the development of Southern California Logistics Airport, specifically with regard to bonds issued in April 2008.
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 converting the base to civilian use.
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.
In August 2013, two separate responses to the SEC complaint were filed, 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.
U.S. District Court Judge John A. Kronstadt heard oral arguments on those motions last October, including assertions by defense attorneys that the SEC had not presented any evidence to show the city or Metzler had benefited from the sale. In November Kronstadt threw out the portion of the lawsuit alleging the city and Metzler improperly benefited from the bond sale. “Given that the SEC has engaged in a three-year investigation into this matter, its decision to present no allegations to support (the claims) is significant and telling,” Kronstadt wrote in his decision. Nevertheless, he granted the SEC an opportunity to amend complaint with proof, at which time the original charges could be reinstated.
On May 21, the SEC did just that, providing the court with an amended complaint containing 20  previously unpresented elements relating to what the SEC maintains was Metzler’s failure to disclose the hangars’ true value to investors on documents related to the bond sales. The complaint was further amended to state that the proceeds from the bond offering benefited the city.
A specific benefit of the bond sales, according to the SEC was that $50 million from the 2008 bond sale was pooled with money from a 2007 bond sale to make a down payment on an electrical plant turbine purchased from General Electric.
The original 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],  the underwriter for the bond offerings, is named in the third, fourth and eighth claims for relief. KND and Jeffrey Kinsell, KND’s owner, are named in the fifth and sixth claims for relief. Victorville, Jeffrey Kinsell, KND investment banker Janees 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. Establishing that the city or its employees benefitted from the bond sale is necessary to force disgorgement of the money.
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.
“Unfortunately for the SEC, the conclusions in the complaint are inconsistent with the mathematical analysis that the SEC had to perform to bring the action in the first instance,” Arent Fox’s reply brief filed last year on behalf of the city and the airport authority states. “As a matter of mathematical fact, regardless of whether the alleged misstated hangar value is used ($65 million), or whether the alleged correct hangar value is used ($27.7 million), the debt service ratio remains above 1.25 in either case.”
Terree Bowers of Arent Fox, the former US Attorney for the Central District of California, is representing the city and the SCLA. This week he told the Sentinel, “We still contend that there is no basis for disgorgement.  Their figures are a gross exaggeration. We are determined to vigorously fight the case. We think it is entirely counterproductive to propose disgorgement in a case like this just when cities are starting to recover from the great recession.”
Bowers has until June 5 to answer the amended complaint and in doing so has the option of moving to strike it entirely.