City of Victorville, CA and Underwriter Sold Muni Bonds Based on Inflated Property Valuations
The City of Victorville, Calif. and Kinsell, Newcomb & DeDios (KND) are among several defendants to be charged with defrauding investors by selling municipal bonds based on inflated property valuations. KND owner J. Jeffery Kinsell, KND Vice President Janees L. Williams, and Victorville Assistant City Manager and former Director of Economic Development Keith C. Metzler also were named in the SEC’s complaint.
According to the complaint, the Southern California Logistics Airport Authority, which is controlled by the City of Victorville, issued millions of dollars in tax increment bonds to finance several redevelopment projects, including the construction of four airplane hangers on a former Air Force base. The bonds were underwritten by KND and solely secured by property-tax increases attributable to increases in the assessed value of property in the area.
When the Airport Authority didn’t have enough money to complete the project, it was forced to issue additional municipal bonds, which the SEC claims were based on inflated property valuations.
"The principal amount of the new bond issue was partly based on Metzler, Williams, and Kinsell using a $65 million valuation for the airplane hangars even though they knew the county assessor valued the hangars at less than half that amount," stated the SEC in the release.
“The inflated figure allowed the Airport Authority to issue substantially more bonds and raise more money than it otherwise would have. It also meant that investors were given false information about the value of the security available to repay them.”
The complaint further alleges that KND, Kinsell, and another of Kinsell’s companies misappropriated more than $2.7 million in bond proceeds.
According to the SEC, Kinsell, through KND Affiliates, LLC, stepped in to manage the hangar construction project after the project's original contractor was accused of fraud.
Though Kinsell had no construction experience, the Airport Authority agreed to pay KND Affiliates a construction management fee of two percent of the remaining cost of construction.
Apparently, that wasn’t enough. According to the SEC, “Kinsell and KND Affiliates took an additional $450,000 in unauthorized fees to oversee the construction and took $2.3 million in fees that the Airport Authority was unaware of and never agreed to, purportedly as compensation to ‘manage’ the hangars.”
In its complaint, the SEC says it is seeking permanent enjoinders, disgorgement of ill-gotten gains plus prejudgment interest, and payment of civil penalties.