WASHINGTON -- The East Baton Rouge Mortgage Finance Authority says it postponed its controversial proposal to redeem $67.5 million of escrowed-to-maturity housing bonds "in order to assist and cooperate" with a Securities and Exchange Commission review of "certain matters" pertaining to the bonds.
The authority made the statement in a press release issued late Thursday, the day it planned to redeem the bonds that had been issued in 1979 and escrowed to maturity in 1989.
The press release does not specify the issues being investigated by the SEC, but says the authority provided the agency with information about the secondary market trading of the bonds.
The release says, "the authority is confident that the SEC will share the authority's concern that a small number of the secondary market trades of the Series 1979 bonds by certain broker/dealers may have been at prices which appear to not reflect the authority's expressly retained right to optionally redeem" them following their defeasance in January 1989.
William D. Ross Jr., the authority's program administrator, said in an interview Friday that the authority voluntarily postponed the redemption until the SEC could clear up the current confusion about escrowed-to-maturity bonds.
"We think the whole thing needs to be clarified from every aspect," including the responsibilities of issuers and broker-dealers with regard to calling and trading these bonds, he said.
According to Ross and the press release, the authority met with the SEC on May 5, at the authority's request, to discuss and provide information about the bonds and proposed redemption. The SEC, in a letter dated May 13, asked the authority to submit additional information by May 19.
Ross said he could not discuss the information that the SEC requested because the agency's investigation is confidential.
The SEC sent its letter to the authority about the same time that a group of investors asked the SEC to investigate whether the proposed redemption would violate securities laws. At the same time, Stoever, Glass & Co., a broker-dealer in New York City, warned the agency and the authority that it would take legal action if the redemption occurred.
Shortly afterward, Christopher A. Taylor, the executive director of the Municipal Securities Rulemaking Board, said if the bonds were redeemed he would ask the SEC and National Association of Securities Dealers to investigate whether the bond firms involved in the 1989 refunding fulfilled their disclosure responsibilities.
Taylor repeated that warning Thursday when he learned that the authority was postponing the redemption. "There are two questions that are always going to be there." he said. "Did the underwriters fulfill their responsibilities in 1989" when the bonds were refunded and escrowed to maturity? And, "Was there a violation of the disclosure laws?"
The investors and several broker-dealers have charged that the authority either did not retain its right to call the bonds or did not properly disclose that it had retained the call right when the bonds were refunded and escrowed to maturity in 1989.
Neither the official statement for the refunding bonds nor the escrow agreement mention the bonds are callable, they said, contending this violates the disclosure requirements set forth by the SEC staff in a June 1988 letter to the MSRB.
The authority's press release, however, said the authority "is confident of its legal right" to redeem the bonds before their stated maturities. The authority said it disclosed that it had retained its right to call the bonds in notices of defeasance that were widely published on Feb. 2, 1989 and Feb. 9, 1989. The notices of defeasance were attached to the escrow agreement, authority officials said.
In addition, the press release says, the authority's retention of its redemption rights were "accurately and clearly reported by major national municipal securities information services" such as "Kenny Information Services and Bloomberg Financial Markets Commodities News."
Mary Ellen Cannon, vice president and director of research for J.J. Kenny Information Services in New York, said yesterday that the bonds were listed as callable in the third supplement to the "KIS Prerefunded Service" for 1988, which was published on Feb. 3, 1989.
But Michael Hastings, manager of municipals at Bloomberg Financial Markets in Princeton, N.J., said that while Bloomberg currently shows the bonds as callable "we have no way of knowing when we got that information."
"We don't know whether or not we put that information in that day, a year later, or last year," Hastings said. Last year, a Bloomberg employee who is no longer at the company said the bonds would not have been listed as callable until at least late 1989 or early 1990 because the service did not provide information on refundings until then.
Tom Garske, manager of secondary markets for Muniview, The Bond Buyer's database, said Muniview lists the bonds as escrowed-to-maturity and provides no call information. Typically, the call information on such bonds is only provided upon request, he said.
An official with ADP Inc. in Roseland, N.J., who asked not to be identified, said ADP listed the bonds as escrowed-to-maturity and noncallable. Last year, an official there who has since left the company said the bonds had been listed until June 1992 as noncallable.
However, Moody's Municipal & Government Manuals for 1989 and 1990 described the bonds as callable.