Government Law

Federal judge grants rare TRO banning city's 'fraudulent' bond sale; SEC sought the emergency order

Following an emergency hearing Wednesday, a federal judge in Chicago OK’d a temporary restraining order sought by federal regulators to prevent a suburban town from proceeding with a planned bond sale called “fraudulent” by the Securities and Exchange Commission.

The order imposed on Harvey and its comptroller concerns a hotel and conference center which the SEC describes in a press release as a “decrepit shell” despite $14 million raised by prior limited-purpose bond offerings that was supposed to be spent on the project.

In contravention of what investors were told about how the bond money would be used, at least $1.7 million went to cover the financially struggling town’s operating expenses and some $269,000 went to the comptroller, Joseph Letke, the SEC contends in the Northern District of Illinois civil suit it filed Tuesday against the two. The SEC complaint (PDF), which requests a jury trial, also seeks disgorgement from Letke and to put a lid on further municipal spending, aside from basic bill-paying, until a court-appointed consultant can complete a financial review.

The suit contends the city of 26,000 or so residents violated Section 17(a) of the Securities Act of 1933, as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, by making materially misleading statements to investors about its financial condition and the purpose of its planned bond offering.

Although it isn’t unusual for the SEC to seek emergency court action concerning claimed misrepresentations in stock offerings, this may be the first time the SEC has done so in a municipal bond sale, the Bond Buyer reports.

The DealBook page of the New York Times (reg. req.) calls the move by the SEC “unprecedented.”

“We moved quickly to stop this city and its comptroller from issuing more bonds under false pretenses,” said Andrew J. Ceresney, who directs the SEC’s enforcement division, in the release. “We will continue to aggressively pursue municipalities and public officials who raise money through fraudulent bond transactions that harm both investors and residents.”

Harvey agreed to the temporary ban on bond sales, which lasts until mid-July.

The Wall Street Journal (sub. req.) says the newspaper couldn’t reach the city’s mayor and law director, or an Ungaretti & Harris lawyer who represents Letke, with requests for comment.

The Chicago Tribune, Courthouse News and Reuters also have stories.

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