SEC Brings its First Charges Against a Municipal Issuer

town toyota center

Nine Washington cities and counties in the Wenatchee Valley region thought it would be a good idea to join forces to build a regional events center and ice hockey arena. They formed the Greater Wenatchee Regional Events Center Public Facilities District and authorized the District to issue bonds to fund the construction of the Town Toyota Center. In 2011 the District defaulted on $41.77 million in bonds anticipation notes.

According to the SEC order, the problem began at the start when the developer/operator, the district, and its consultants had trouble arranging financing. That was in part because earlier projections raised questions about the Center’s economic viability. Unexpected building costs led to overruns and a redesign to a smaller facility. Even though the developer was experiencing weak ticket sales and seeing other troubling signs about future revenue, it revised its projections upward.

The District issued Bond Anticipation Notes to raise capital in the fall of 2008 to purchase the Center from the developer. Those notes are short term and issued in anticipation of a future issuance of long term bonds to pay them off in three years at maturity. The District had to use those notes because the bond market was shut down by the financial crisis of 2008.

In 2011, the Center’s revenues were worse than its pessimistic obligations and was operating at a significant loss. That means the Center did not have the cash flow to support the issuance of long term bonds and was unable to pay the notes at maturity in 2011.

The big problem was a disclosure in the offering document for the notes that the financial projections and assumptions had not been reviewed by a third party. In fact, they had been reviewed and the independent consultant raised concerns.

“This municipal issuer is paying an appropriate price for withholding negative information from its primary offering document and giving investors a false picture of the future performance of the project.” – Andrew Ceresney, co-director of the SEC’s Division of Enforcement

Whether it’s a municipal issuer or a private fund, full and honest disclosure is important so an investor has all the material facts to make his or her investment decision. “The SEC is happy to go against sloppy, negligent conduct if need be.