SEC brings fraud charges against 2 city officials

In what many see as a precedent-setting move, the U.S. Securities and Exchange Commission yesterday announced fraud charges against a Michigan city as well as two of its former officials in connection with a municipal bond offering to support a failed movie studio project.

This is the first time the SEC has charged a municipal official under a federal statute that provides for “control person” liability.

According to the SEC, its investigation found that documents provided to investors during the city of Allen Park’s sale of $31 million in general obligation bonds contained false and misleading statements about the scope and viability of the studio project as well as the city’s overall financial condition and its ability to service the bond debt.

The city and the two officials – former Mayor Gary Burtka and former City Administrator Eric Waidelich – have agreed to settle the SEC’s charges.

“Allen Park solicited investors with an unrealistic and untruthful pitch, and used outdated budget information in offering documents to avoid revealing its budget deficit,” said Andrew Ceresney, director of the SEC’s Enforcement Division.

The SEC alleged that Burtka, who has agreed to pay a $10,000 penalty, was “an active champion of the project” and in a position to control the actions of the city and Waidelich with respect to the fraudulent bond issuances. Based on this control, the SEC charged Burtka with liability for violations committed by the city and Waidelich.

“When a municipal official like Burtka controls the activities of others who engage in fraud, we won’t hesitate to use every legal avenue available to us in order to hold those officials accountable,” said LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit.

According to the SEC, the city began planning the studio project in late 2008, following state legislation that provided significant tax credits to film studios conducting business in Michigan, with the belief it would bring much-needed economic development. The plan was for a $146 million facility, and the city initially planned to repay investors with $1.6 million in revenue from leases at the site.

By the time the city issued bonds in 2009 and 2010 to raise funds to help develop the site, Allen Park’s plans and fiscal situation had both deteriorated, but these changes were not reflected in the bond offering documents or public statements.

Michigan appointed an emergency manager for Allen Park in October 2010, citing the failed studio project as a primary factor in the city’s deteriorating economic condition.