San Clemente Warns Against Claims It Backs Junk Bonds

A proposed $17.5-million tax-free junk bond deal promoted by a controversial San Francisco underwriter has prompted complaints from San Clemente officials over sales pitches that may imply the city is issuing the bonds.

City Treasurer Paul Gudgeirsson said the city has nothing to do with the high-risk bonds, marketed on behalf of Pacific Ocean Estates Public Financing Authority to raise cash to acquire and develop a 210-acre parcel just outside the San Clemente city limits.

Gudgeirsson said the city has received more than 100 phone calls from people who say that advertisements on a local financial news cable channel or sales pitches from brokers led them to believe San Clemente was backing the deal.

The bond deal is one of a group of tax-free bond offerings being scrutinized by both the state attorney general and the federal Securities and Exchange Commission.

The deals were put together by San Francisco underwriter Pacific Genesis Group Inc. David Fitzgerald, principal of the firm, said he believes that state law allows public agencies to bestow tax-exempt status on bonds for projects in which the agencies have no stake.

Some critics say these Pacific Genesis deals encourage financially strapped government agencies to sell their tax exemptions to the highest bidders. State Treasurer Matt Fong last month issued a public request for the SEC to investigate nine bond deals that Pacific Genesis had put together.

The Pacific Ocean Estates financing authority, formed by the city of Waterford and the Merced County Board of Education in Central California, accepted a “service fee” to give the bonds tax-exempt status, which would benefit a private developer who wants to purchase the Orange County property.

Bond industry insiders say the fees typically run from $30,000 to $50,000.

Waterford and Merced school officials referred all questions about the bonds to Bill Gnass, a private attorney in Waterford. Gnass could not be reached for comment. Waterford is a rural town of 6,500 people in the foothills east of Modesto. The Merced County school district serves portions of an agricultural county of nearly 200,000 in the San Joaquin Valley.

Fitzgerald said Friday that, while the Pacific Ocean Estates bond issue did not close on Thursday as scheduled, its fate is still undecided. Industry sources say the sale didn’t close because the bonds aren’t moving well, but Fitzgerald would only say that he is still considering the situation and hasn’t ruled out extending the sale period.

His office would not provide any information from the offering statement regarding the identity of the developer, and officials in San Clemente said they have been rebuffed in their attempts to obtain a copy of the statement.

Fitzgerald said that his company was not misrepresenting the deal, but didn’t rule out the possibility that “overenthusiastic” sales agents might have implied that San Clemente was involved.

Waterford and the Merced County Board of Education are partners in several other public authorities formed to sell the agencies’ tax-exempt status to bond deals marketed by Pacific Genesis, according to Fong’s office.

The Pacific Ocean Estates sales campaign apparently began several months ago. “The calls that we’re getting, both from residents and brokerage firms, is that we are a part of this bond issue,” said Gudgeirsson, the city treasurer. “That is not the case.”

“If our citizens are buying these bonds, I’d advise caution,” he said. “We as a city have expressed our concerns to the state treasurer’s office.”

Also contributing to this report was Times correspondent Julie Fate Sullivan in San Clemente.