LOS ANGELES -- The Securities and Exchange Commission is investigating a Fresno County, Calif., Marks-Roos bond pool that purchased five local obligations, two of which later defaulted on bondholder payments.
This is the third SEC inquiry into Marks-Roos bond pools that has been publicly identified in recent weeks. Like the others, it is believed to be part of a probe by the agency into the adequacy of disclosure information provided to Marks-Roos bond investors.
In the latest inquiry to surface, the SEC is focusing on the issuance in 1990 of $29.78 million of unrated public capital improvement revenue bonds by the Central San Joaquin Financing Authority, located in the Fresno County city of Reedley.
The underwriter on the negotiated deal was Seidler-Fitzgerald Public Finance. Calls to executives in the firm's Los Angeles office over a three-day period this week were not returned.
The Bond Buyer reported in October that the SEC is investigating two Marks-Roos pooled financings in 1989 in Wasco and Avenal, Calif., under-written by San Francisco-based First California Capital Markets Group Inc.
The Marks-Roos Local Bond Pooling Act of 1985 authorizes public agencies to fund several capital projects at a time by bundling together different debt issues. The pooling achieves economies of scale for participants.
A total of 419 Marks-Roos issues, valued at $11.6 billion, were issued in California from 1985 to 1993, according to the California Debt Advisory Commission.
Some of the Marks-Roos issues have aroused the attention of government officials. The Debt Advisory Commission, an arm of the California treasurer's office, has held public hearings on the bonds, and it is scheduled to release later this month a draft report recommending possible state legislative changes to the Marks-Roos act "to eliminate abuses," said Steve Shea, the commission's policy research director.
Legally structured as a joint powers authority under California law, the Central San Joaquin Financing Authority issued its Marks-Roos bonds in May 1990. Proceeds were used to underwrite bonds or other obligations of five public entities that belong to the authority.
Revenues that repay the Marks-Roos bonds are obtained from the public entities, which are required to pay debt service on the local obligations purchased by the authority.
However, in 1992, one of the authority's agency members, the Chow-chilla Memorial Hospital District, defaulted on $4.72 million of local obligation revenue bonds purchased by the authority in July 1990.
Another authority member, Mendota, Calif., also defaulted on a $2.24 million assessment bond in 1992, said David Weiland, contract attorney for the city of 8,000.
"We're very optimistic ... that we will be able to structure a deal that will get everything paid off, ultimately," Weiland said yesterday.
Other authority participants -- Sierra Kings Hospital District, 6,067-population Orange Cove, and 2,781-population San Joaquin -- have made scheduled payments, sources said.
Following the Chowchilla default, semiannual interest payments to the Marks-Roos holders were lowered, according to a notice sent to bondholders by the trustee, State Street Bank and Trust Co. of California.
The Central San Joaquin Financing Authority met on Wednesday, but attorneys instructed attendees not to talk to the press, said Anthony B. Lopez, city administrator for Orange Cove. "The only thing I can tell you" is that Orange Cove's bondholder payments are current, he added.
A lawyer with the Marks-Roos issue's San Francisco-based bond counsel, Jones Hall Hill & White, said the firm could not provide any information on settlement negotiations or other matters connected with the transaction until early next year.
"We are in the process of mediation, sorting out various allegations -- all of this is going into settlement discussions," said Stephen L. Taber, a partner with Hanson, Bridgett, Marcus, Vlahos & Rudy in San Francisco, general counsel for the Chowchilla hospital district.
In a related matter, the Chowchilla hospital district has filed a suit against Fresno-based Community Hospitals of Central California, whose contract to operate the 24-bed hospital ended in May 1991.
The complaint says Community Hospitals failed "to determine that Chowchilla lacked the financing capacity to repay the bonds from the revenue source available to it." The complaint also says Community Hospitals applied bond proceeds "to purposes prohibited under the terms of the bonds."
The SEC, meanwhile, has refused to comment on its involvement in the Central San Joaquin Financing Authority transaction.
"The policy of the SEC is neither to confirm nor deny the existence of any investigation," said David B. Bayless, the SEC's district administrator for San Francisco, which is the SEC's base of operations for northern California and the Pacific Northwest.
The SEC has stepped up its municipal bond enforcement efforts after Arthur Levitt became SEC chairman in July 1993. Levitt has said he is concerned about the integrity of the process through which municipal bond issues are sold to investors. The Bond Buyer has reported that the agency is conducting at least 24 municipal probes nationally.
The SEC is in charge of enforcing federal securities laws, which prohibit individuals from misrepresenting or omitting material facts in connection with the sale of securities. Violators can be fined, disbarred, or subjected to other penalties.
The SEC investigation related to the Central San Joaquin Financing Authority was confirmed by Dan DeSantis, president of the authority and administrator of Sierra Kings Hospital District.
DeSantis, however, said he could provide little background information on the Marks-Roos pool. "I am the wrong guy to ask" for information, he said. The topic is "very large and complicated and I don't think many people understand it completely."
Sources believe the SEC is interested in exploring whether the official statement omitted material information that prevented investors from making informed investment decisions. The SEC is also said to be concerned that Marks-Roos proceeds were used to purchase ineligible investments.
Seidler Fitzgerald was the under-writer, but a large portion of the Marks-Roos bonds were purchased by M.L. Stern & Co., Beverly Hills, Calif., and resold to investors.
John Greshman, a first vice president with M.L. Stern, said he has had trouble obtaining information on financing developments. "Our lines of communication have been essentially cut because nobody will talk," he said.
The San Joaquin authority's bonds were sold in two term maturities, with coupons of 7.90% in 2011 and 8.0% in 2021. Greshman said "there have been bond calls" on portions of each maturity as the trustee has received prepayments from some local obligations that were refinanced or had excess proceeds.
