SEC Bond Cases: Illinois Mayer Settles Municipal Bond Fraud Charges for $10K, Ethiopia’s Electric Utility Pays Over $6M to Resolve Bond Offering Violations, and Miami , Fla. Likely to Come Under Scrutiny in Civil Trial

Mayor of Harvey, Illinois Barred From Future Involvement In Muni Bond Offerings
Eric J. Kellog, the mayor of Harvey, Illinois, will pay $10K to resolve the Securities and Exchange Commission’s case accusing him of municipal bond fraud. As part of the settlement, Kellog has agreed to never take part in a muni bond offering again.

According to the Commission, Mayor Kellogg was tied to a number of fraudulent bond offerings made by the city of Harvey. Investors thought their money would go toward building a Holiday Inn hotel when, instead, at least $1.7M in bond proceeds were diverted to cover the city’s payroll and pay for operational costs that had nothing to do with the hotel construction project.

Kellogg was in charge of Harvey’s operations. His signature was on key offering documents used by the city of Harvey to sell and offer the municipal bonds. The SEC said that the mayor was liable for fraud as a control person under the Securities Exchange Act.

By settling, Kellog is not denying or admitting to the SEC findings.

Ethiopia’s Electric Utility Pays Over $6M to Settle SEC Municipal Bond Case
In other bond fraud news, the SEC has reached a settlement with the Ethiopian Electric Power over charges that the foreign electric utility did not register the bonds that it sold and offered to U.S. residents who were of Ethiopian descent. EEP will pay almost $6.5M to resolve the case accusing it of violating U.S. securities laws.

 

The SEC said that EEP held the unregistered bond offering to help pay for the construction of a hydroelectric damn in Ethiopia. EEP marketed the bonds on its U.S. Embassy website, on radio and TV, as well as conducted shows in U.S. cities. The electric utility’s efforts allowed it to raise about $5.8M from over 3,100 U.S. residents from ’11 – ’14. The entire time the bonds were not registered with the regulator.

Although it is legal for foreign governments to come to the U.S. capital markets to raise money, they still have to abide by federal securities laws. A failure to register the bonds is a violation of these laws. The SEC intends to use the settlement to give investors back their money in addition to interest.

City of Miami, Florida and SEC Fail to Settle Civil Case
The Florida city of Miami and the SEC may head to trial if they remain unable to settle the regulator’s probe, which has been going on for nearly seven years. The Commission says that the city moved restricted funds into operating accounts that were losing money to hide losses even while telling bond investors that their investments were doing fine.

Miami’s lawyers remain adamant that what was going on was more poor budget practice than a scam to bilk the public. They claim that the SEC has no evidence proving that Miami violated securities laws or hurt even one bond investor. Rather than settle, the city plans to take the case to court. A jury trial is set for August.

Meantime, the SEC is asking for a permanent injunction preventing the Florida city from taking part in improper budget practices. It wants civil penalties.

The SEC Complaint in the Municipal bond case involving the mayor of Harvey, Illinois (PDF)

The SEC Order in the EEP case (PDF)

SEC charges city of Miami with fraud, Reuters, July 19, 2013