Bond firm threatens suit over Victorville probe costs (September 18, 2012)

SAN FRANCISCO — A bond underwriter has threatened to sue Victorville. for the cost of investigations into the California city’s bond deals.

Victorville staff have recommended that the City Council reject the claims by Kinsell, Newcomb & De Dios for their costs in dealing with probes by the Securities and Exchange Commission and the San Bernardino County grand jury stemming from bond deals involving KND.

Lawyers for the broker-dealer based in Carlsbad, Calif., said in a letter to the city dated Aug. 23 that they would seek available legal remedies if the city refused to settle.

Victorville city manager Doug Robertson said in an email that the city would be putting together a fact sheet about KND’s claims since it has generated so much interest.

Regarding any and all claims, California law requires a formal response within a certain time frame and denial does not indicate an unwillingness on the part of the city to attempt to resolve the matter, Robertson said. The council was set to discuss the matter Tuesday night.

Kinsell, Newcomb & De Dios did not respond to a request for comment by deadline Tuesday.

In 2008, KND agreed to pay the IRS $5 million to close 26 examinations of the tax-exempt status of roughly $800 million of bonds it underwrote that were issued by several California school districts.

Earlier this year, the the local district attorney raided the offices of Alta Vista Financial, a bond firm linked to KND executive vice president Jeffery Kinsell,in connection with a corruption investigation of a former employee, according to the U-T San Diego newspaper.

According to the U-T report, the San Diego County DA is investigating allegations of pay-to-play by school officials at the Sweetwater Union High School District and the Southwestern Community College District. Alta Vista Financial terminated its Financial Industry Regulatory Authority registration in December; Kinsell was listed as president, according to FINRA records.

KND’s holding company, KND Holdings Inc., and its various subsidiaries have received numerous subpoenas because of the probes into Victorville’s finances, according to the letter to the city from its attorney, Kenneth Lounsbery of Lounsbery Ferguson Altona & Peak LLP in San Diego.

At the heart of the SEC inquiry is the question of disclosure by the issuer of all material facts relevant to the subject of bond issues, the letter said. The heart of KND’s response to the inquiry is its due diligence that all material information was disclosed.

KND’s attorney noted that the city attorney served as co-disclosure counsel on the bond sales in question.

Kinsell had to give a day of testimony to the grand jury, and the SEC continues to interview most employees of the firm and all written material has been handed over to the regulator, the letter said.

The company said it responded to SEC concerns about its role in various bond issues, accounting, and its participation in construction projects, specifically if appropriate disclosure was made to investors and whether KND adhered to the Municipal Securities Rulemaking Board’s Rule G-37 governing political contributions.

Victorville, with a population of 111,000, is located about 80 miles from Los Angeles.

A county grand jury in July tried to detail the convoluted finances of Victorville and its related agencies, and revived questions about the way the high-desert city used bond proceeds.

The city’s financial record-keeping appears to have gone amiss as the municipal government embarked on ventures to convert the mothballed George Air Force Base into an air cargo hub and to construct a power plant.

A review by Harvey M. Rose Associates for the grand jury examined a long list of questionable financial practices, the most serious of which include the misuse of bond proceeds.

The report tied most of the concerns specifically to the city’s Southern California Logistics Airport Authority, a redevelopment agency overseen by Victorville and the Victorville Municipal Utility Services.

According to the Rose report, the SCLAA repeatedly mishandled bond expenditures, including spending bond proceeds on development projects outside its scope and dedicated area.

The report also detailed poor financial management of SCLAA money by overspending $103 million to build four aircraft hangers and losing more than $50 million on a power plant project — projects that KND was involved in.

The SCLAA has already defaulted on debt payments. City staff said the SCLAA paid off the default in March and made a full payment on the bonds in June.

Source: Randall Jensen, Bond Buyer