In the case of Clearwater Cay CDD, it’s hard to feel much sympathy for OppenheimerFunds. After all, the money manager known for taking bets on risky securities bought into an unrated project backed by Clark, now revealed to be a convicted criminal. Among other things, he “sold units Cay Clubs had acquired, to himself, while increasing the sales price,” and “used proceeds from the investor sales to purchase a gold mine, a coal reclamation project and a rum distillery for his personal benefit.” And that’s just part of the scheming. It takes a special level of fraud to get 40 years in prison.
On the other hand, it’s not as if the property is completely uninhabitable. The offering documents say this (emphasis mine):
The District covenants in the Indenture, that if any 2006 Assessment shall be either in whole or in part annulled, vacated or set aside by the judgment of any court, or the District shall be satisfied that any such 2006 Assessments are so irregular or defective that it cannot be enforced or collected, or if the District shall have omitted to make such 2006 Assessments when it might have done so, the District shall either: (i) take all necessary steps to cause a new Assessment to be made for the whole or any part of such improvement or against any property benefited by such improvement; or (ii) in its sole discretion, make up the amount of such Assessment from legally available monies.
At first glance, this reads as a pledge to do everything possible to make assessments and pay investors. The documents go on to suggest foreclosure proceedings should any property owners fail to pay what they owe, though it does say the district is merely “authorized” to commence legal action, rather than required. But overall, the protections appear strong enough that it’s not an obligation from which officials can easily walk away.
The tricky part is determining precisely what bondholders deserve to be paid. These aren’t property taxes backed by full faith and credit,rather, they are levies on “land within the District specifically benefited by certain infrastructure improvements” financed by the debt proceeds. Dwyer’s side argues the condo owners have gained virtually nothing and so should pay virtually nothing.OppenheimerFunds disagrees.
None of this is ideal for any of the parties involved. Perhaps that’s why in the 2015 fiscal year, the district took some land and a shopping center and exchanged it in return for canceling some of the outstanding bond payments. But even that came with added drama: No appraisal was done. A judge found that the valuation was arbitrary and there needs to be a reassessment of what property owners ought to pay. That technically could be higher, but will probably end up being lower, in a victory for Dwyer and a hit to OppenheimerFunds’s investment.
Bruce Barnes, the attorney who represented the owners, said he considers the ruling “a substantial victory for the owners, depending upon what ultimately transpires in the new assessment procedure now underway.” He said it could leave residents entitled to refunds for the assessments that have been paid since 2015. At the very least, he says, a “conservative model” from a financial adviser has residents owing $900,000 to OppenheimerFunds, rather than $4.3 million.
What’s clear is that when a Ponzi scheme and bond covenants collide, neither side is going to wind up perfectly happy. After hearing the full extent of Clark’s fraud, and seeing their Venice dreams dashed, it’s entirely understandable that landowners feel cheated. OppenheimerFunds, with extensive experience in this arena, is fighting for its investors, some of whom are likely individuals that count on its battle-tested team. Neither can hope to fix the damage done. They can only sort out the wreckage.
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.