WASHINGTON -- The Securities and Exchange Commission yesterday charged an underwriting firm and official and a bond lawyer in Jackson, Miss., with fraud in connection with seven low-income housing issues totaling $20 million that were sold by two Mississippi counties in 1992 and 1993.
The underwriter, Thorn, Alvis, Welch Inc.; its president, John E. Thorn Jr.; and bond lawyer Derryl W. Peden with Stennett Wilkinson & Pedenwere charged with funneling a total of more than $1 million in bond proceeds to a developer, which then kicked back the money as "contributions" to help finance the purchase and rehabilitation of low-income housing projects.
In fact, the money was allegedly used to pay issuance costs in an apparent violation of two federal tax law provisions that limit the amount of bond proceeds that can be used for non project-related costs and issuance costs.
Under the tax law, low-income housing and other private-activity bonds are not tax-exempt unless at least 95% of the proceeds are used for the exempt purpose of the bond issues. In addition, no more than 2% of the bond proceeds can be used for issuance costs.
The SEC charged the underwriter and bond counsel with fraud because they failed to make proper disclosures about the bond issues in the offering documents, said Richard Wessel, the administrator for the SECs district office in Atlanta, and William Hicks, trial counsel for the district.
The official statements for the bond issues said that the developer was making cash contributions to the projects, they said. But the "contributions" were made with bond proceeds that eventually were used to help pay issuance costs, they said.
The SEC officials said that the underwriter and bond counsel also failed to disclose that the bonds might not be tax-exempt because of the apparent tax law violations.
The order institutes public administrative and cease and desist proceedings against the firm and Thorn and cease and desist proceedings against Peden.
Neither Thorn nor Peden could be reached for comment on the SEC charges.
"This is the first time we have brought a case on this point or this issue," William McLucas, SEC enforcement chief, said in a telephone interview. "It really goes to the use of proceeds and how much can be used to cover costs that would otherwise exempt the nature of the offering."
The SEC undercovered the alleged scam during an examination of the underwriting firm and then spent about six months investigating the seven bond deals.
The deals were:
* $1.375 million bond issue sold by Warren County, Miss., on Aug. 27, 1992.
* $950,000 bond issue sold by Hinds County, Miss., on Jan. 21, 1993.
* $2.470 million issue sold by Warren County on March 23, 1993.
* $1.865 million issue sold by Hinds County, on April 30, 1993.
* $625,000 issue sold by Hinds County, on May 15, 1993.
* $4.050 million issue sold by Hinds County, on June 25, 1993.
* $7.950 million issue sold by Hinds County, on Oct. 13, 1993.
The SEC officials said they could not say whether the IRS is pursuing the alleged tax law violations. The SEC enforcement action, however, comes as the SEC and IRS have vowed to work together in a new beefed-up bond enforcement program.