Securities Fraud and the Governmental Issuer
| Jurisdiction | United States,Federal,Colorado |
| Citation | Vol. 08 No. 1987 Pg. 1392 |
| Pages | 1392 |
| Publication year | 1987 |
1987, August, Pg. 1392. Securities Fraud and the Governmental Issuer
Recent case law in the area of securities fraud litigation mandates a closer look at bond issues on the part of municipalities, counties, school districts and special districts. While such issuers can expect bondowner suits in the event that principal or interest is not paid when due, additional causes of action brought under federal securities statutes often are an unpleasant surprise for the governmental issuer. These claims raise questions for issuers regarding the roles of the various parties to the transaction and their legal counsel.
This article discusses recent securities fraud litigation directed against the municipal issuer. It also identifies the roles of the parties of the transaction.
A recent decision in federal court issued subsequent to the Securities Reform Act of 1975(fn1) dictates greater care on the part of the governmental issuer. In In re Washington Public Power Supply System Securities Litigation ("WPPSS case"),(fn2) the court rejected Tenth and Eleventh Amendment and sovereign immunity defenses in ruling that the federal securities laws may be constitutionally applied to municipal issuers. Misrepresentation or other fraudulent conduct in connection with the purchase and sale of securities is prohibited by relevant federal statutes and regulations, § 17(a) of the Securities Act of 1933 ("1933 Act"),(fn3) § 10(b) of the Securities Exchange Act of 1934 ("1934 Act")(fn4) and Rule 10b-55 promulgated thereunder.
A description of a case currently pending in U.S. District Court for the District of Colorado brings the concerns raised by the WPPSS case closer to home. In Whalen v. The Heitner Corp.,(fn6) a purchaser of Industrial Development First Mortgage Revenue Bonds ("IDBs") filed a class action suit seeking declaratory and injunctive relief, damages and rescission. The claims brought against the defendants, including the Colorado municipal issuer, include violations of § 17(a) of the 1933 Act; § 10(b) of the 1934 Act and Rule 10-b5 promulgated thereunder; the Racketeer Influenced and Corrupt Organizations Act;(fn7) the Colorado Securities Act of 1981;(fn8) and various other state Blue Sky laws and common law tort claims based on fraud, negligence and misrepresentation.
The bonds were issued to finance the construction of a hotel. As additional security for payment of the principal and interest, the borrower, a limited partnership, obtained a "standby loan commitment" from the construction lender. Under that commitment, the lender agreed in the case of default to loan the limited partnership an amount sufficient to repay the principal amount of the bonds and up to six months' interest. Details of the standby loan commitment were set forth in the document offering the bonds (the "official statement") approved by the issuer.
The standby loan commitment was assigned to the trustee for the bonds. When the limited partnership defaulted on the bonds, the trustee attempted to activate the standby loan commitment. The construction lender was unable to honor the commitment and is now under the protection of the U.S. Bankruptcy Court. The limited partnership has also filed a bankruptcy petition.
In the complaint, Whalen alleges that the construction lender issued the standby loan commitment without valid "participation agreements" from its shareholder savings and loans, and had minimal net worth itself. Whalen also alleges that the participation agreements referred to in the official statement were forgeries, but legal counsel for the construction lender issued an opinion that the participation agreements were valid and binding and enforceable by the construction lender or the holder of the standby loan commitment...
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