Brokerage Accused of Fraud in $70-Million Bond Offering
Pacific Genesis Group Inc., an Alameda-based municipal-bond underwriter, has been charged by U.S. regulators with fraudulently selling $70 million worth of bonds over four years to finance a Southern California housing development where the regulators allege little construction occurred.
Pacific Genesis Chairman David Fitzgerald, who also was charged, said he and the firm would contest the Securities and Exchange Commission’s civil-fraud allegations.
“The SEC is making reckless kinds of comments,” Fitzgerald, 40, said in an interview. “We haven’t gotten a single complaint from investors, nor have they lost a dime.”
The SEC alleged that the brokerage used an inflated appraisal to mislead investors about the value of the land at a 1,700-home project near San Bernardino. The land, which was used as security for the bonds, was actually worth one-fifth its appraised value, the SEC contended in a civil-fraud suit filed in federal court in San Francisco.
Pacific Genesis and Fitzgerald, according to documents, also misled investors about the status of the project and the likelihood that the bonds would be repaid from project revenue, the suit alleged.
The development, called the Rancho Lucerne Master Planned Community, isn’t worth enough to generate revenue to cover its debt expenses, the SEC alleged. Investors in old offerings for the site are being paid from revenue raised by new debt offerings in a so-called Ponzi scheme, the suit contended.
Pacific Genesis has made eight bond offerings in connection with the development since August 1996, the SEC said. The agency is seeking unspecified fines and the return of underwriting fees received in connection with the offerings.
The SEC said it also obtained a court order requiring Pacific Genesis to put the proceeds from a pending $13.5-million offering in escrow pending a Jan. 5 hearing.
In February 1999, Pacific Genesis agreed to settle charges brought by California regulators that it defrauded investors by failing to disclose the risks of tax-exempt municipal bonds that helped finance speculative real estate deals. Under terms of that agreement, Pacific Genesis agreed to market its land-backed bonds only to suitable investors and disclose risks connected with the transactions. The firm, which didn’t admit or deny any wrongdoing, also agreed to pay $250,000.
