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Monday, April 13, 2015

SEC ANNOUNCES JUDGEMENT BARING DEFENDANTS FROM PARTICIPATING IN MUNICIPAL BOND FUNDING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Litigation Release No. 23229 / April 6, 2015
Securities and Exchange Commission v. Gary J. Burtka, Civil Action No. Civil Action No. 14-cv-14278 (Cohn) (E.D. MI)
Securities and Exchange Commission v. Eric C. Waidelich, Civil Action No. Civil Action No. 14-cv-14279 (Cohn) (E.D. MI)
SEC Obtains Final Judgments Against Gary Burtka and Eric Waidelich

The Securities and Exchange Commission announced that on January 28, 2015, the Honorable Avern Cohn of the United States District Court for the Eastern District of Michigan entered final judgments settling fraud charges brought by the Commission in related suits against defendants Gary J. Burtka and Eric C. Waidelich, the mayor and city administrator of Allen Park, Michigan.  Both judgments bar the defendants from participating in any municipal bond offerings and enjoin them from future violations of certain antifraud provisions of the federal securities laws.  The judgment against Burtka also imposed a $10,000 civil penalty.

The Commission’s Complaints, and an administrative proceeding the Commission filed against the City of Allen Park, arose from the city’s issuance of $31 million in general obligation bonds to support a movie studio project.  The Commission alleged that the city began planning the studio project in late 2008 in the hope it would bring much-needed economic development.  The state of Michigan had just enacted legislation that provided significant tax credits to film studios conducting business within the state.  The original plan detailed a $146 million facility with eight sound stages led by a Hollywood executive director, and the city planned to repay investors with $1.6 million in revenue from leases at the site.  The city issued bonds on November 12, 2009 and June 16, 2010 to raise funds to help develop the site.

The Complaints alleged that, by the time the bonds were issued, the city’s plans to implement and pay for the studio project had deteriorated into merely building and operating an onsite vocational school.  However, none of these changes were reflected in the bond offering documents or other public statements.  Investors were left uninformed not only about the project’s deterioration, but also about the substantial impact it would have on the city’s ability to service the bond debt, which comprised approximately 10% of the city’s total budget.  Moreover, the city used outdated budget information in the bond offering documents that did not reflect the city’s budget deficit of at least $2 million for fiscal year 2010.  The studio project collapsed within months of the second bond issuance, and the state appointed an emergency manager in October 2010, citing the failed project as a primary factor in the city’s deteriorating economic condition.

The Complaint against Waidelich alleged that, as city administrator, he reviewed and approved the offering documents provided to investors.  Those documents contained false and misleading statements about the scope and viability of the movie studio project as well as Allen Park’s overall financial condition and its ability to service the bond debt.  The Complaint against Burtka alleged that he was an active champion of the studio project and in a position to control the actions of the city and Waidelich with respect to the fraudulent bond issuances.  Based on this control, the Complaint charged Burtka with liability for violations committed by the city and by Waidelich.  This was the first time the Commission charged a municipal official under a federal statute that provides for “control person” liability.

Burtka and Waidelich consented to the entry of the Commission’s proposed judgments against them.  On November 25, 2014, Judge Avern Cohn held a status conference and asked the Commission for briefing on specific developments that occurred between the issuance of the first and second bonds, the harm caused by the fraud, and whether additional parties should be held responsible.  On January 28, 2015, the Court entered the judgments, imposing a $10,000 civil penalty against Burtka and enjoining him from further violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and enjoining Waidelich from further violations of Section 17(a)(2) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.  The Court also barred Burtka and Waidelich from participating in any municipal bond offerings.  Judge Cohn also posted comments explaining the basis for his decisions.

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