The Securities and Exchange Commission has obtained an emergency court order against a Chicago suburb and its comptroller to stop a fraudulent bond offering that the city has been marketing to potential investors.
The SEC has filed fraud charges in U.S. District Court for the Northern District of Illinois against the city of Harvey, Ill., and Joseph T. Letke alleging that they have been engaging in a scheme for the past several years to divert bond proceeds for improper, undisclosed uses. The SEC’s complaint alleges that the purported purpose of prior bond offerings was to fund the development and construction of a Holiday Inn hotel in Harvey. However without informing investors, Harvey officials diverted at least $1.7 million of bond proceeds from these offerings to pay the city’s operational costs such as its payroll, and Letke received approximately $269,000 in undisclosed payments derived from bond proceeds. While investigating Harvey’s past bond offerings to investors, the SEC learned that the city is intending to issue new limited obligation bonds as early as this week, and draft offering documents make materially misleading statements about the purpose and risks of those bonds while omitting that past bond proceeds have been misused.
In response to the SEC’s request for emergency relief, Judge Rebecca Pallmeyer conducted an emergency hearing today and issued a temporary restraining order preventing Harvey from offering or selling any bonds through July 14. At the hearing, Harvey agreed to this restriction.
Illinois at the state and local level is a train wreck waiting to happen. Interest rates are headed up anyaway, so there is no reason to be holding any municipal bonds, never mind bonds out of Illinois.