According to the lawsuit, the bonds were issued with the purpose of refinancing the debts for construction redevelopment projects including the construction of airport hangars. The airport authority financed the construction of four hangars in a former Air Force base with the tax increment bonds which are repaid by property tax increases. The other redevelopment projects mentioned in the complaint were also funded in the same manner.
While the airport authority partially refinanced the debt in 2008, it based the value of the new bonds on a valuation of the hangars made by the underwriters. While the underwriters valued the property at $65 million, at the same time, the county assessor had valued the hangars close to $30 million, though that lower estimation was ignored by the city authorities.
The SEC alleged that accepting the much higher valuation made by the underwriter helped the airport authority issue more bonds, and mislead the bond investors about the probability or security of returns.
The lawsuit mentioned that about $55 million of the debts issued by the airport authority is in default and is currently being traded at about 45 cents on the dollar.
The SEC lawsuit mentioned, "Misstatements and omissions in the Official Statements for the Authority's bonds from November 2006 through April 2008 were material because a reasonable investor would want to know about an undisclosed financial arrangement … These misstatements and omissions were also material to the Authority because such fees increased the costs of issuing the bonds."
The SEC has also pointed out that the KND Affiliates LLC, which is also partly owned by the underwriter, used a fee arrangement to pay itself at least $450,000 more fees than it could have conceivably claimed, and "misappropriated $2.3 million of bond proceeds through a fictitious 15 percent monthly "property management fee."
