Currently, the bonds are in default and no substantial work has taken place on the project. When the bonds were sold to investors in October 2000, approximately half of the proceeds were used to acquire land and for professional fees. The balance of the proceeds remains in escrow.
Named in both the criminal indictment obtained by the U.S. Attorney's Office and in the Commission's civil complaint were Terry Martin of Mukilteo, Wash., the controlling shareholder of the project's developer; J. David Smith of Edmonds, Wash., the developer's attorney; and John H. White of Stanwood, Wash., and Edward L. Tezak of Sheridan, Mont., who were involved in arranging private financing for the project.
Also named in the Commission's civil complaint were Michael McCall of Elk Grove, Calif., and Charles Tull of Bellingham, Wash., attorneys who represented Holmes Harbor Sewer District in the bond sale; Ibis Securities of Walnut Creek, Calif., the underwriter of the bonds; Ibis principals Kenneth Martin of Concord, Calif., and George Tamura of San Leandro, Calif.; and Signal Mortgage, Inc., a Washington state mortgage broker of which defendant John H. White was a vice president and part owner.
The Allegations
According to the pleadings, the bonds were sold to investors in October 2000 based on information contained in an Official Statement, a written offering document that explains key features and risks for a bond offering, that the developer, attorneys and underwriter each either drafted or reviewed. The Official Statement contained several material misrepresentations and omissions, including the following.
Use of Proceeds to Acquire Land: According to the Official Statement, $6.2 million in bond proceeds would be used to acquire 15 acres of land for certain public purpose portions of the project. This claim was false. In fact, the developer used $6.2 million in bond proceeds to acquire a total of 39.9 acres, which included land for both the public and private purpose portions of the project.
Involvement of Prominent Investment Bank: The Official Statement represented that an entity called Goldman/Sig LLC had agreed to be a participating mortgage lender for the project. According to the Official Statement, Goldman/Sig LLC was formed by Goldman Sachs, Private Client Services, along with Signal Mortgage. This claim was false. Goldman Sachs, Private Client Services had no involvement with the bonds or the project, and did not participate in the formation of Goldman/Sig LLC.
Existence of Construction Financing for Project: The Official Statement represented that the developer had entered into an agreement with Goldman/Sig to "fund infrastructure construction and office building construction through completion and provide long-term mortgage financing." This statement was false and misleading because Goldman/Sig had no ability to provide the nearly $65 million in financing required to complete the project.
Value of and Existence of Lease Agreement for the Project: According to an appraisal contained in the Official Statement, at the time the bonds were sold the developer had entered into a lease agreement covering the entire property with a single, unidentified tenant with a "Triple A (corporate) credit rating." Based on this information, the appraisal concluded that the project when built would have a value of $90 million. This claim was false and misleading. In fact, the developer had entered into an agreement with a small firm with a total of six employees and annual revenues of approximately $600,000, and no capacity to meet the projected monthly lease payments for the six buildings to be constructed in the project. Moreover, the Official Statement failed to disclose that the developer had entered into a side agreement that allowed the lessee to cancel the lease at any time.
Undisclosed Payments to Offering Participants: The Official Statement disclosed that bond proceeds would be used to pay $100,000 to attorney Tull's law firm and $140,000 to attorney McCall's law firm for their work in providing legal opinions on the bond offering. However, the Official Statement failed to disclose that on the day the bond offering closed, the developer used bond proceeds to make additional payments of $60,000 to Tull and $45,000 to McCall. The Official Statement also failed to disclose that shortly after closing the developer used bond proceeds to make a $200,000 payment to underwriter Ibis and a $50,000 payment to Tezak, who was purportedly involved in obtaining private financing for the project.
The Criminal Charges
United States Attorney John McKay stated that Terry Martin, J. David Smith, John White, and Edward Tezak were charged by a federal grand jury sitting in Seattle, Wash., with 20 counts of conspiracy in violation of Title 18 U.S.C. Section 371, securities fraud in violation of 15 U.S.C. Sections 78j and 78ff, and wire fraud in violation of 18 U.S.C. Section 1343. Mr. McKay cautioned that an indictment is only an allegation and that these individuals charged are presumed innocent until proven guilty at trial. Mr. McKay indicated further that his office would continue to aggressively pursue criminal securities violations and coordinate such cases with the Securities and Exchange Commission.
The Commission's Civil Action
The Commission's civil complaint charges Terry Martin and two of his corporate entities (Silver Legacy Corporation and Silver Sound LLC), as well as Smith, McCall, Tull, Kenneth Martin and Tamura with fraud in the offer and sale of securities in violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
In addition, the complaint charges that Tezak, White, Signal Mortgage and Goldman/Sig violated Section 17(a) of the Securities Act and violated or aided and abetted violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Finally, the complaint charges that Ibis violated Section 17(a) of the Securities Act, and Municipal Securities Rulemaking Board Rule G-17, and Sections 10(b) and 15B(c)(1) of the Exchange Act and Rule 10b-5 thereunder. The Commission seeks permanent injunctions prohibiting future violations against each defendant, as well as the return of all monies received as a result of the fraud plus pre-judgment interest, and civil money penalties.
Helane L. Morrison, head of the Commission's San Francisco District Office, said: "Gatekeepers, such as attorneys and underwriters, are essential to the integrity of the municipal bond market. Today's action should serve as a strong reminder that the Commission will aggressively pursue those who would compromise the integrity of that market by engaging in fraud."
