WASHINGTON -- Barnett Banks Trust Co. is warning new holders of the Duval County, Fla., Housing Finance Authority's $4.5 million Marsh Oaks housing bond issue that the bonds are in technical default because the developer failed to make full payments under a loan agreement.
But the trustee bank for the issue cautioned the new bondholders that it is still bound by a directive from the prior bondholders not to taken any action to recover the money owed by the developer unless the new bondholders issue some other directive.
The bank disclosed the information in a notice sent to bondholders after the bonds were sold. The notice was sent to private information vendors this week and was published as a secondary market disclosure message.
The $4.5 million Marsh Oaks bond issue, which is under investigation by the Internal Revenue Service because it was closed without cash by Matthews & Wright Inc. in 1985, was held by Eaton Vance High Yield Municipal Securities Trust and United States Trust Company of New York, as trustee for Municipal Securities Trust High Income Series No. 7.
The bonds were registered in the nominee names for Eaton Vance and U.S. Trust, but those registered names were recently changed, sources said. It is not clear whether U.S. Trust continues to hold the $1.5 million of Marsh Oaks bonds it purchased years ago.
But Eaton Vance, sources said, sold the $3 million of the bonds it had held several weeks ago through First American Securities Inc. in Little Rock, Ark.
Jim Swink Jr., a trader with First American Securities, said the bonds were sold to a mix of institutional and individual investors but would not name them. He said the investors were informed before they bought the bonds of the ongoing payment default and the IRS investigation.
Mr. Swink was formerly the head trader of municipal bonds at Swink & Co., a broker-dealer that was formally expelled from the securities business by the National Association of Securities Dealers in 1990 for allegedly "scheming to defraud" its clearing firm. The Securities and Exchange Commission currently has civil charges pending against him and other officials with Swink & Co.
In a complaint filed two months ago in the U.S. District Court for the Eastern District of Arkansas in Little Rock, the SEC charged that Swink & Co., aided and abetted by the younger Mr. Swink and other officials of the firm, violated numerous book, record-keeping, and notice provisions of the Securities Exchange Act of 1934 and also failed to meet minimum net capital requirements on eight occasions with regard to its municipal bond business.
The notice that Barnett Banks Trust Co. sent to bondholders said, "the current bondholders have not directed the trustee to take remedial action with respect to the events of default" and that the bank "continues to be bound by the direction given by Eaton Vance and U.S. Trust ... until such time as the current bondholders direct the trustee" to take action.
Meanwhile, the issuer of the Marsh Oaks bonds and the developer of the project said yesterday that even though the apartment complex was built and is currently more than 90% occupied, the developer has been in default in its payments under the loan agreement for the bond issue since 1987.
"They were in technical default some time back because they were only making partial payments. But that was acceptable to the bondholders," said R.C. Pitts, executive director of the Duval County Housing Finance Authority.
"The project has been built and is running very nicely," he said. The developer was having trouble with debt service payments and was trying to arrange for a refunding to reduce the interest rate on the issue, he said. "But when the IRS started their investigation it was difficult to get an opinion from a bond attorney" for a refunding, he said.
James E. Pitts, a general partner of Marsh Trace Ltd., the Florida limited partnership that developed the project (and no relation to Mr. R.C. Pitts), said the partnership never could make a full debt service payment because the project "was too highly leveraged." He confirmed that the limited partnership was "trying to restructure" the original deal.
The bank's notice to bondholders mentioned the IRS investigation and said "it is unknown what action, if any, the IRS may take with respect to the interest on the bonds."
The notice also mentioned a lawsuit that Eaton Vance and U.S. Trust filed on April 25, 1991, against Matthews & Wright and other participants in the Marsh Oaks deal issue on April 25, 1991. Eaton Vance had reportedly withdrawn from that lawsuits, but the plaintiff's names appear unchanged on court documents.
The lawsuit charges Matthews & Wright and other parties to the deal with fraud and other securities law violations. But the Judicial Panel on Multidistrict Litigation recently transferred the lawsuit to the U.S. District Court for the Eastern District of Pennsylvania where it was consolidated and put on hold with other lawsuits against Matthews & Wright.