When the city of Allen Park, Mich., sold $31 million in municipal bonds five years ago to fund a “blockbuster” movie studio center, the SEC says a key fact was withheld from investors: The studio deal was near collapse.
The Securities and Exchange Commission filed civil fraud charges in U.S. District Court on Thursday against former Allen Park Mayor Gary J. Burtka for allegedly leading the bond issue campaign without disclosing the deal’s problems or the fact that his town faced a budget deficit.
Also charged were former Allen Park Administrator Eric Waidelich and the city.
The SEC also announced that all three defendants settled the charges under a deal in which Burtka and Waidelich neither denied nor admitted to the allegations. Burtka also agreed to pay a $10,000 penalty, according to the SEC.
“Municipal bond disclosures must provide investors with an accurate portrayal of a project’s prospects and the municipality’s ability to repay those who invest,” said Andrew J. Ceresney, director of the SEC Enforcement Division. “Allen Park solicited investors with an unrealistic and untruthful pitch and used outdated budget information in offering documents to avoid revealing its budget deficit.”
The studio project completely collapsed shortly after the bond sales, damaging the Detroit suburb’s finances to the point where it was brought under the control of a state emergency manager in October 2010. The manager left in September, but the city remains under the control of a transition board that will oversee its return to home rule, according to published reports.
Burtka, who resigned as mayor in 2011, was one of the prime forces behind the ill-fated bond issue, according to the SEC. Under the plan, the city was to take advantage of new state tax credits for movie makers by partnering with Hollywood producer Jimmy Lifton. The plan was to create a $146 million facility with 750,000 square feet of space and eight soundstages—all on land purchased with funds raised through the bond sale. Lifton would then use the space to run a movie-making operation. The city described the project as a “blockbuster” that would create thousands of jobs.
Behind the scenes, however, the financial underpinnings of the deal began to deteriorate soon after the project was announced, with the city's bond counsel determining that the city couldn't legally donate the land it purchased with the bond funds to the public-private studio partnership.
As the deal neared collapse, Burtka and Waidelich nonetheless went ahead with the bond sales and failed to disclose the financial problems in offering documents, the SEC said.
They also failed to disclose to potential bond investors that Allen Park faced a $2 million deficit in fiscal 2010.
By the time of the first general obligation bond sales in November 2009, in which $28.3 million was raised, municipal officials had decided to turn the property into a vocational school instead of a studio center, according to the SEC. Yet the offering documents still only featured the studio center. A second sale of $2.7 million in bonds in June 2010 also failed to disclose the setbacks.
By covering up the financial problems, the city was able to get an "A" rating on the bond sale from Standard & Poor's, making the bonds more attractive to buyers, the SEC said.