SEC asked to investigate Chicago-area water agency's planned bond redemption.

WASHINGTON -- Bondholders have asked the Securities and Exchange Commission to investigate whether a local water authority near Chicago will violate securities laws if it redeems almost $20 million of revenue bonds next week that were escrowed to maturity or released in 1985.

The Northwest Suburban Municipal Joint Action Water Agency, which issued the bonds in 1982 to finance the construction of water supply facilities for seven municipalities in Illinois, plans to refund and redeem the securities next Wednesday.

But a lawyer representing some of the bondholders told SEC officials in a letter this week that the water agency did not retain its right to call the 1982 bonds in the official statement for the 1985 refunding bonds that were used to defense them.

"Accordingly, we request that the commission commence an investigation to determine whether the agency has violated, or is about to violate, the federal securities laws through the planned redemption," Melvin A. Brosterman, a lawyer with Stroock & Stroock & Lavan in New York, said in a letter to Robert Colby, associate director of the SEC's division of market regulation.

Brosterman, who was involved in a similar dispute in 1993 involving the East Baton Rouge Mortgage Finance Authority in Louisiana, refused to name the bondholders he is representing in this action or to disclose how many of the water agency's bonds they hold.

"We think the regulators have to carefully evaluate whether the redemption is permissible in light of the disclosures that were made and that were not made," Brosterman said in an interview yesterday.

The holders of the water agency's bonds say that the SEC made clear in a 1988 interpretation of the anti-fraud provisions of the federal securities laws that issuers have to disclose that they are retaining, their right to call escrowed-to-maturity or defeased bonds in the official statements of the refunding bonds and the notices of defeasance.

In a letter to the Municipal Securities Rulemaking Board, the SEC said, "A municipal issuer that wishes to reserve its contractual right to exercise optional redemption provisions in the prior bonds should clearly and conspicuously disclose its intention in the defeasance notices and official statement for the refunding bonds."

In this case, the bondholders say, the water agency did not retain its right to call the bonds in the official statement for the refunding bond issue.

"As a result of the agency's conduct, the marketplace has classified the bonds as escrowed to maturity and the bonds sold at substantial premiums," Brosterman said in the letter to the SEC.

Redeeming the bonds early, he said, "will cause substantial harm to investors."

Lawyers from Schiff Hardin & Waite in Chicago, the water agency's bond counsel for the refunding issue that is to close next week, admit that the agency did not retain its right to call the bonds in the official statement for the 1985 refunding bonds.

But they said this does not matter because the document contained no defeasance or call information about the 1982 bonds and was directed at purchasers of the refunding bonds, not the holders of the 1982 bonds.

"We don't think there was anything that was in the slightest, misleading in the 1985 official statement," said C. Richard Johnson, a lawyer with Schiff Hardin.

Johnson; Jim Mann, another Schiff Hardin lawyer; officials-from R.V. Norene & Associates Inc., the agency's financial adviser; and John Nuveen & Co., the underwriter of the proposed refunding bond issue, all insist the agency did everything it could to retain its right to call the 1982 bonds before their stated maturities or mandatory sinking fund redemption dates.

"The agency did not give up its right to call the bonds," Johnson said.

The water agency stated that it was retaining its right to call the 1982 bonds in its resolution authorizing-the 1985 refunding issue, in the 1985 escrow agreement for the 1982 bonds, and in the notices of bond defeasance that were published in the Chicago Tribune and The Bond Buyer on Aug. 21, 1985, and Aug. 28, 1985.

Johnson and Mann suggested that the SECs 1988 statement that issuers should retain their right to call defeased or-escrowed-to-maturity bonds in the official statement for the refunding bonds is not applicable in this case.

"You couldn't follow that guidance in 1985 because it hadn't been given yet," said Johnson.

But one regulatory official in Washington Who asked not to be identified said that the SEC guidance is not time-sensitive because it is an interpretation of the anti-fraud provisions of federal securities laws that have been on the books for years, not just since 1988.

Meanwhile, representatives for both sides of the dispute are arguing about whether the bond information services reported that the bonds were callable.

Dan Kaplan, a vice president of John Nuveen & Co., produced documents showing that Bloomberg Financial Markets in May 1994 and J.J. Kenny Information Service's KIS Prerefunded Bond Service in 1992 had both indicated the bonds were callable.

But a trader, who did not want to be identified, produced documents showing that J.J. Kenny's KIS Prerefunded Bend Service in 1991 did not say anything about the water agency's retaining its right to call the bonds.

Sources with KENNYBASE, J.J. Kenny's electronic data base that gives descriptive and pricing information on more than 1.6 million municipal bond issues, said they listed the water agency's bonds, since the 1985 refunding, as escrowed to matUrity but noted that the issuer had retained the right to call the bonds.

Sources at Bloomborg said they also described the bonds as escrowed to maturity, but initially said it was not known if the bonds were callable.

Jimmy Klotz, president of First Miami Securities, said yesterday that the water agency's planned refunding and redemption is "similar to the situation with East Baton Rouge, where the SEC stepped in and discouraged the refunding." Klotz, whose firm had traded the East Baton Rouge bonds, declined- to say whether he is involved in the current dispute.

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