WASHINGTON -- The East Baton Rouge Mortgage Finance Authority, La., faced with threats of a federal investigation, yesterday shelved its controversial proposal to redeem almost $67.5 million of single-family mortgage bonds that had been issued in 1979 and escrowed to maturity in 1989.
The redemption had been scheduled for today. The authority had planned to redeem the bonds with money from the collapse and liquidation of the escrow that had been set up to pay debt service on the bonds.
But the authority's board held a special meeting yesterday and voted to "defer" the redemption and to rescind the notice of redemption that was published on April 16, according to a source connected with the authority who did not want to be identified.
At the same time, the board clarified that it was not giving up its right to redeem the bonds at a later date before their stated maturities, the source said.
Authority officials could not be reached for comment on why they decided not to go through with the redemption. But the source said the action might be explained to be press released that is expected to the released today.
The 11th-hour decision to shelve the proposed refunding comes just days after a group of investors asked the Securities and Exchange Commission to investigate whether the redemption would violate securities laws.
It also follows a warning that if the bonds were redeemed, the Municipal Securities Rulemaking Board would ask the SEC and the National Association of Securities Dealers to investigate whether the firms involved in the 1989 refunding properly advised the issuer of its disclosure responsibilities. That warning had been issued by Christopher A. Taylor, the MSRB's executive director.
In addition, Stoever, Glass & Co. in New York City and other broker-dealers had threatened to take court action against the authority if the redemption occurred.
The broker-dealers and investors contended 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 where refunded in 1989.
They said that neither the official statement for the refunding bonds or the agreement that authorized the establishment of the escrow to pay debt service on the bonds stated the issuer had retained its call right.
SEC and MSRB officials added fuel to those charges by stating repeatedly over the last several months that an SEC staff letter that wa sent to the MSRB in June 1988 made clear that any issuer that wanted to retain its right to call bonds that had been escrowed to maturity had to disclose that fact in the official statement for the refunding bonds and the escrow agreement.
But authority officials had said they disclosed that they had retained their call right in the notice of defeasance that was attached to the escrow agreement and in several notice on the refunding that were published in widely read newspapers. They contended the call information did not have to be in the official statement for the refunding bonds because those bonds were sold to taxable investors.
The authority has insisted that an early redemption of the bonds would not violate any laws or regulations. In an offense-is-the-best-defense move, the authority recently suggested the SEC investigate whether certain broker-dealers sold the bonds at premium prices that were too high and did not accurately reflect that the call right had been retained.