Municipal Bonds

SEC Accuses California School District of Misleading Municipal Bond Investors

Published on: July 11, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is accusing Kings Canyon Joint Unified School District of not giving municipal bond investors the financial data and notices to which they were entitled. The California school district settled the SEC’s findings without denying or admitting to the charges. Kings Canyon has consented to an order to cease and desist from future violations of the Securities Act’s Section 17(a).

During a 2010 bond offering, Kings Canyon affirmed to investors that the school district was in compliance with previous continuing disclosure duties. In three bond offerings totally more than $30 million between ’06 and ’07-of 419 million, $4.5 million, and $6.7 million, respectively-Kings Canyon had a contractual duty to disclose specific yearly financial data and notices about certain bond-related events.

For example, says the SEC, when Kings Canyon performed a $6.8 million bond offering in 2010, the school district was obligated to describe whenever it hadn’t materially complied with previous disclosure duties. With its 2010 offering documents in a fourth, muni bond offering-this one of $6.8 million-the school district made statements that were inaccurate when it affirmed that in the last five years it had always complied materially with past ongoing disclosure duties. She SEC said that since Kings Canyon did not turn in certain contractually mandated disclosures related to the 2006 and 2007 bond offerings, the bond offering document in November 2010 had a statement about a material fact that wasn’t true.

OppenheimerFunds, Franklin Templeton Sue Over Puerto Rican Debt Law

Published on: July 2, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Investment firms OppenheimerFunds Inc. and Franklin Templeton (BEN) have filed a lawsuit claiming that Puerto Rico’s new law, which lets certain government agencies restructure their debt, violates the constitution. Lawmakers in Puerto Rico approved the bill last month.

Aside from its power agencies, the entities that would be allowed to restructure the debt under the new law include Puerto Rico’s water and transportation agencies. Collectively, all of the agencies have about $19.4 billion in outstanding bonds. The Act does not have provisions for restructuring tax-backed bonds and general-obligation bonds.

The two fund managers together hold about $1.7 billion in Puerto Rico Electric Power Authority debt. They want the legislation, known as the Public Corporations Debt Enforcement and Recovery Act, blocked.

SEC Stops Fraudulent Bond Offering by Chicago Suburb

Published on: June 25, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has gotten an emergency court order against the city of Harvey. The order puts an end to a bond offering that the Chicago, Illinois suburb was promoting. Also named in the order is Joseph T. Letke, the city’s controller.

The regulator contends that Harvey and Letke allegedly took part in a securities scam to use proceeds from the bonds for undisclosed, improper uses. The bond offerings were supposed to pay for a new Holiday Inn. Instead, officials purportedly took at least $1.7M of the proceeds to cover operational costs for the city. With the temporary order, Harvey is not allowed to sell or offer any bonds through the middle of July.

Per the SEC complaint, Harvey’s bond offerings from ’08-’11 were limited obligations bonds. The bond offerings had to be used for their intended purpose. Also the money that was raised needed to go toward the construction of the hotel. This is because funds that were supposed to pay back the bonds came from tax revenues that would be impacted by the progress and funding of the project. News reports reveal that the proposed Holiday Inn hotel and conference center have yet to be finished, with the hotel’s facade appearing gutted in certain places.

UBS AG Under Criminal Investigation Over Puerto Rico Bond Fund Sales

Published on: June 21, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Authorities in the United States are reportedly investigating UBS AG (UBSN) for its actions in Puerto Rico. The criminal fraud investigation comes in the wake of allegations that an ex-UBS broker in Puerto Rico told clients to improperly borrow money to purchase local mutual funds that later sank.

The investigation is centered around non-purpose loans that came from UBS Bank USA of Utah. The former UBS broker, Jose Ramirez, organized the loans for clients. The bank has since let him go.

Under internal guidelines, such loans are not allowed to be used for the purchase of securities since those very securities will be the collateral for the loans. Now, however, investors are saying that Ramirez was utilizing these loans to purchase more shares in the bond funds for them. Some are even saying that he gave them paperwork that made it appear as if customers were borrowing from the UBS bank in Puerto Rico and not the one in Utah. More than 100 investors may have been affected.

Puerto Rico-Based Doral Financial Expected to Default on Over $150M in Muni Bonds

Published on: May 12, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Moody’s Investors Service (MCO) and other credit rating agencies are saying that there is a good chance that Doral Financial Corp. (DRL), which is based in Puerto Rico, will default on over $150M muni notes and bonds. Moody’s has downgraded both a note and a bond that was issued by the Puerto Rico Conservation Trust Fund, in which Doral Financial Corp. is the obligor, from Caa3 to C. This is the lowest rating the agency can give before an investment defaults. This prediction comes after regulators determined that receivables from Puerto Rico’s government couldn’t be included in Doral Financial’s Tier 1 capital.

The receivables were $289M out of Doral’s $679M of Tier 1 capital. The regulators’ decision will compel the bank to up its capital or turn in a contingency plan to liquidate, merge, or sell. The plan has to be submitted to the Federal Deposit Insurance Company (“FDIC”).

Moody’s also downgraded senior secured bonds from Doral Properties, a Doral Financial subsidiary, from Caa3 to C, while Fitch Ratings lowered Doral Financial’s issuer default rating from CCC to C (the credit agency’s second lowest possible rating). Standard & Poor downgraded the bank to CC, which is its third lowest rating.

FINRA Sees 10% Rise in Arbitration Cases, Puerto Rico Bond Claims A Factor

Published on: April 27, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to statistics put together by the Financial Industry Regulatory Authority, the number of securities arbitration cases brought by the self-regulatory agency is on target to exceed last year’s total. A likely contributor to the increase can be attributed to the numerous Puerto Rico municipal bond cases already filed by investors who sustained huge losses. More of these are inevitable, especially as FINRA just increased its arbitrator pool to deal with cases involving muni bonds from the US territory.

The broker-dealer regulator said that during this first quarter alone, 1,011 FINRA arbitration cases were submitted-a definite increase from the 919 securities arbitration claims filed during 2013’s first three months. However, the number of arbitration cases that were closed during this first quarter is less than in two years prior, with just 946 resolved. Compare that to the over 4,400 and 4,800 cases in 2013 and 2012, respectively.

That said, 5O% of arbitration cases decided during this initial quarter rendered damage awards, which is more than in the last two years. The most common claim in FINRA arbitration cases filed in 2014 so far is breach of fiduciary duty. Negligence, failure to supervise, and breach of contract are the other leading claims.

SEC Takes a Closer Look at Municipal Bonds

Published on: April 15, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission is finally beginning to scrutinize municipal bond issuers. Recent efforts include the opening of investigations into whether certain municipalities misled investors about their financial well-being before they made their bonds available to them.

The SEC’s municipal-bond enforcement unit is searching for occurrences involving “tension” involving “disclosures and the subsequent announcements” by municipal issuers of financial problems. The regulator is a telling underwriter and issuers that they will be subject the less harsh penalties if they choose to self-report violations rather than waiting for an enforcement action.

The $3.7 trillion muni bond industry is essential for not just local governments but also for investors. Retail investors, especially senior investors, have long looked to muni bonds for tax-free income.

Large Hedge Funds Invested in Puerto Rico Bonds

Published on: April 11, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to The Wall Street Journal, a number of large hedge funds and other nontraditional buyers got involved in Puerto Rico debt last month during the US Territory’s $3.5B bond sale, buying up to 70% of the deal. Brigade Capital Management, Och-Ziff Capital Management (OZM) LLC, Perry Capital LLC, Paulson & Co., and Fir Tree Partners were among those to purchase over $100M of the bonds. Black Rock Inc. (BLK), which is also a hedge fund, bought in as well. However, the list doesn’t indicate whether the firms still hold the bonds or if they have sold them since. (The Municipal Securities Rulemaking says that investors originally holding the bonds have already sold about $1.7 billion of the bond since it was issued.)

Some of the other buyers that bought into the Puerto Rico bond sale in March were Harvard University, OppenheimerFunds (OPY), a unit of Gannet Co., and a number of banks, insurers, and retail investors. (Also, many investors may not be aware of this but as of the end of last year, David Lerner Associates, the privately held broker-dealer that was the exclusive distributor of the troubled Apple non-traded REITs had invested in a big way in Puerto Rico debt via its Spirit of America Hi Yield Fund.)

Since the bond sale, underwritten by Morgan Stanley (MS), Barclays (BARC), and RBC Capital Markets (RBC), the prices of Puerto Rico bonds have dropped. Prior to the sale the major credit rating agencies had downgraded the bonds to junk status, and many investors who bought into Puerto Rico municipal bonds through firms such as UBS (UBS), Banco Santander (SAN), Banco Popular, and other brokerage firms, were already filing securities fraud claims over their investment losses.

Bank of America Settles Mortgage Bond Claims with FHFA for $9.3B

Published on: March 29, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America (BAC) will pay $9.3 billion to settle securities claims that it sold faulty mortgage bonds to Freddie Mac (FMCC) and Fannie Mae (FNMA). The deal, reached with the Federal Housing Finance Agency, includes $3.2 billion in securities that the bank will buy from the housing finance entities and a cash payment of $6.3 billion.

The mortgage bond settlement resolves securities lawsuits against the bank, Countrywide, and Merrill Lynch (MER). FHFA, which regulates both Freddie Mac and Fannie Mae, accused Bank of America of misrepresenting the quality of the loans behind residential mortgage-backed securities that the mortgage financing companies purchased between 2005 and 2007.

This is the 10th of 18 securities lawsuits reached by the FHFA over litigation involving around $200 billion in mortgage-backed securities. To date, it has gotten back over $10 billion over such claims.

Puerto Rico Bonds Are at Record Low Prices After FINRA Announces It Is Looking At Transactions

Published on: March 27, 2014 | by Shepherd Smith Edwards & Kantas, LLP

According to Bloomberg, Puerto Rico bonds that were issued this month are now at record low prices after the Financial Industry Regulatory Authority announced that it is looking at transactions involving the new securities. The US territory sold $3.5 billion of general obligation bonds, which is the largest junk bond offering in the history of the municipal market.

According to numerous financial news sources, the offering documents for Puerto Rico’s newly issued bonds stated there would be a $100,000 minimum order allowed so that the purchasers of the junk bonds would be limited largely to institutional buyers. Their prospectus says that bonds were to be issued at a $100,000 minimum and “integral multiples of $500,000 in excess thereof” unless Standard & Poor’s, Moody’s Investors Services, and Fitch Ratings raise Puerto Rico’s credit to investment grade. All three credit ratings agencies recently declared the US territory’s credit ratings “junk.”

Nevertheless, many transactions under the $100,000 amount have been reported, despite the lack of an upgrade in the bonds. As a result, scores of Puerto Rico bond transactions issued this month were cancelled. There is also data indicating that some brokers are trading under the $1,000 minimum established by the prospectus.