WASHINGTON -- The owners of an apartment complex financed with a black box bond issue have charged the Riverside County, Calif., Housing Authority and other participants in the bond deal with fraud and misconduct in a lawsuit filed in California.
The lawsuit was filed last month in the state superior court in Riverside County by Cross Creek Village, the owners of the housing complex that was formerly called Ironwood.
The suit alleges that the Riverside County authority and other participants in the $13 million housing bond deal, which had the Ironwood black box bond deal "knowingly" took part in a "sham closing" of the bonds in late 1985 that has since led the Internal Revenue Service to revoke the bonds' tax-exempt status.
Cross Creek charges the authority and other participants with "failing to actually issue ... tax-exempt municipal bonds as promised."
The suit seeks at least $20 million and asks the court to declare that Cross Creek is not obligated to pay any of the legal costs that have resulted from litigation over the Ironwood bonds and the $17.5 million Whitewater Garden black box same participants and was closed in the same manner at the same time.
The Riverside County authority is insisting that Cross Creek pay more than $500,000 in legal expenses incurred when the authority sued the IRS to prevent it from taxing holders of the Whitewater Garden and Ironwood bonds, the Cross Creek suit says.
William Rosenberger, executive director of the authority, said in an interview yesterday that the authority was a conduit issuer. He said the bond documents state that the owners of the housing projects are responsible for any legal costs associated with the financings.
Rosenberger said the authority was not aware of the circumstances surrounding the closing of the bonds until two months later.
The bond deal was closed without cash by Matthews & Wright Inc. on Dec. 31, 1985, and the bonds were warehoused with an unlicensed offshore shell bank until February 1986, when they were sold to public investors.
The IRS contends that the bonds were subject to arbitrage rebate requirements because they were not validly issued until after the rebate requirements took effect on Jan. 1, 1986. The IRS began taxing the bondholders' interest earnings after the authority refused to rebate arbitrage from the deals.
Cross Creek said in the lawsuit that the authority did not seek its consent in bringing litigation against the IRS.
The lawsuit does not identify the officials of Cross Creek Village.
Roy Rifkin, a lawyer with the firm of Wolf, Rifkin & Shapiro in Los Angeles, who represents Cross Creek, refused last week to identify officials in the partnership and could not be reached yesterday for comment about other details of the suit.
But sources familiar with the Ironwood bond issue said one of the owners of Cross Creek is James J. Keefe, the man the IRS has alleged is the mastermind of the black box structure of the Whitewater Garden and Ironwood issues, and other bond deals.
Keefe owned stock in Unified Capital Corp., the mortgage broker that had control of the bond proceeds in these deals, and was a part owner of Mercantile Capital Corp. and the special purpose corporations that were set up to provide credit enhancement.
In the black box deals that were done in the mid-1980s, participation interests in the mortgage notes securing the properties were to be sold to third party investors. The sales proceeds were then to be used for credit enhancement for the bond issues. But often, the investors could not be found and the bond proceeds were used for credit enhancement instead of the projects.
Such was the case with the Whitewater Garden apartments, which were never built. The bond proceeds were locked into a guaranteed investment contract.
The Ironwood project, now named Cross Creek Village, was built. But it is not clear whether the project was built with bond proceeds or proceeds from the sale of the mortgage notes.
Both the Whitewater Garden and Ironwood bonds are due to be redeemed later this year.
The other participant in the Ironwood deal named in the Cross Creek suit is Matthews & Wright, the lead underwriter, which is no longer in the municipal bond business and now operates under the name Helmstar Inc.; Donaldson, Lufkin & Jenrette Securities Corp., another underwriter of the bonds; Interfirst Bank Houston, now called NationsBank of Texas in Houston, the trustee; Commercial Bank of the Americas, the unlicensed offshore shell bank; Camfield & Christopher, counsel to the housing authority; and Stubbeman, McRae, Sealy, Laughlin & Browder, the lead underwriter's counsel and special tax counsel.
