In early November, the Securities and Exchange Commission announced fraud charges against two officials of the City of Allen Park, Michigan relating to bonds issued by the City in 2009 and 2010. These charges reflect the SEC's ongoing scrutiny of the municipal finance market. Notably, the SEC has taken the unusual step of holding city officials responsible for the conduct of their subordinates based on a provision of the Securities Exchange Act of 1934 that was enacted to prevent high-level officials from hiding behind lower-level officials. In particular, the SEC has alleged that the former mayor of the City, Gary Burtka, directly or indirectly controlled both the City and the former city administrator, Eric Waidelich, when the City omitted material facts that rendered disclosures in the City's offering document misleading.
The facts are as follows. In 2008, the City entered into a public-private partnership that used the proceeds of city bonds to help finance a $146 million movie studio project to be run by a Hollywood producer. Those bonds were to be paid both with city tax revenues as well as from revenues generated by the project. The bonds were issued despite the fact that the City realized it could not keep its commitment to donate land to the project, which resulted in the Hollywood producer withdrawing his financial support for the Project. As a result, the City faced a $2 million budget deficit and lost a major source of revenue to pay the bonds – none of which was disclosed in the offering documents. Mayor Burtka was charged with fraud, despite the fact that he did not prepare or sign the offering documents, which were primarily prepared by city administrator Waidelich. In charging the Mayor, the SEC alleged that he championed the Project, making numerous public pronouncements that were misleading, and was in a position to control the actions of the City and the City's Administrator.
Without admitting or denying the SEC's findings, the City, Mayor Burtka and City Administrator Waidelich have agreed to settle the SEC's charges. The Mayor will pay $10,000 to settle, while the City has agreed to a cease and desist order from the SEC and will adopt a written disclosure policy, will retain disclosure counsel on future offering documents, and will provide training to all personnel involved in the City's bond offering and disclosure process.
The SEC's Division of Enforcement has stated that the most effective deterrent to fraudulent activity is individual liability, and that it plans to look for opportunities to bring charges against individuals who participate in violating federal securities laws, focusing specifically on pension fund abuses, pay-to-play violations and undisclosed conflicts of interest.