LOS ANGELES -- Three bond financings underwritten by First California Capital Markets Group Inc. are being investigated by the Securities and Exchange Commission, an executive with the San Francisco-based broker-dealer confirmed last week.
Arch Zellick, chief financial officer for First California, said last Thursday that the SEC asked his firm for documents relating to two Marks-Roos pooled financings the firm underwrote in 1989 on behalf of public financing authorities in Wasco and Avenal, Calif., and for documents on the firm's underwriting of a 1990 Mello-Roos bond issue for Nevada County, Calif.
The Wasco and Avenal finance authorities bought $4.5 million of the Nevada County Mello-Roos bonds, which defaulted on two separate scheduled bondholder payments this year.
First California's Zellick said the broker-dealer is cooperating with the SEC's inquiry, and he is hopeful the firm will not be subjected to enforcement actions for securities laws violations.
"But you never know," he said. "Sure, I would expect not to be [sanctioned] because I think we do pretty clean business."
The SEC is in charge of enforcing federal securities laws, which prohibit individuals from misrepresenting or omitting material facts in connection with the sale of securities. Violators can be fined, disbarred, or subject to other penalties.
Zellick said SEC enforcement officials came to First California's San Francisco headquarters on July 15, but that since then he has heard "not a peep" from the regulatory agency.
Reached for comment, Robert Singletary, SEC enforcement chief for the agency's San Francisco district office, said it is the SEC's policy to neither confirm nor deny whether the agency is conducting an investigation.
Wasco, a city of 17,000 located 27 miles northwest of Bakersfield in California's Central Valley, in September 1989 formed a public financing authority that issued $35 million of unrated, local-agency revenue bonds as part of a Marks-Roos pool. A month before, Avenal, a city located 65 miles southwest of Fresno with 12,041 people, created a public financing authority that sold $11 million of Marks-Roos revenue bonds.
In December 1990, Wasco used $3.5 million of its Marks-Roos proceeds and Avenal invested $1 million of its Marks-Roos proceeds to buy a portion of a $9.1 million issue of unrated Mello-Roos special tax bonds issued by Nevada County, located about 40 miles northeast of Sacramento. Proceeds were intended to fund improvements and pay off assessment liens in a community facilities district called Wildwood Estates. The county's bonds were issued under the Mello-Roos Community Facilities Act of 1982.
Special property taxes that secure the bonds -- payable in annual installments -- have been missed four consecutive times. Because of the delinquencies and a nearly extinguished reserve fund, the county defaulted on scheduled bondholder payments due March 1 and Sept. 1.
Currently, Wasco and Avenal's Markso-Roos pools own nearly all of Nevada County's Mello-Roos bonds that remain outstanding following a tender offer by the county last February that restructured the issue and took out all other investors.
Wasco finance director Dru Gibson and Avenal city manager Melissa Harriman said Friday that they had not received any calls from MarksRoos investors wondering about the status of the bonds.
Tom Keene, a senior associate for Burke, Williams & Sorensen, special counsel to Wasco and Avenal, said Friday that the last time he checked, reserves on hand for the two Marks-Roos pools were sufficient "to deal with that cash-flow crisis" created by the Nevada County default.
Meanwhile, Jim Curtis, county counsel for Nevada County, said last week that the county has been contacted by the SEC regarding the Wildwood Estates financing, and is cooperating. He declined to discuss the matter further.
Two members of the Nevada County financing team that structured the Mello-Roos issue also were asked for documents by the SEC, including the transaction's bond counsel and financial adviser.
"We received from the SEC an inquiry asking us to furnish any information on that project with regard to First California, [and its chairman] Michael Richardson," said Edwin N. Ness, president of Sturgis, Ness, Brunsell & Assaf, an Emeryville, Calif., law firm that served as bond counsel on the Nevada County deal.
Ness said the firm reviewed its files "with regard to that firm up to the point the bonds were issued." He added, "We didn't have much."
Also, the Nevada County Mello-Roos financial adviser, Rauscher Pierce Refsnes Inc., was contacted by the SEC, said Virginia L. Horler, a Rauscher Pierce senior vice president and managing director.
"We are cooperating fully with the investigation," she said. "That is about all I think I want to say. I do not know what the focus of the investigation is."
William F. McKay of McKay & Associates, in Sacramento, which was paid about $4,000 by First California to appraise the Wildwood Estates property, also said he was contacted by the SEC.
"They wanted the notes I had and I guess a copy of the appraisal," McKay said. "They didn't ask me any questions at all ... I don't know anything about what they wanted."
In addition, the SEC contacted a Sacramento, Calif.-based independent consulting firm that provided Wasco and Avenal public financing authority officials with a report on the suitability of investing MarksRoos proceeds in the Nevada County Mello-Roos bonds.
"I did receive a letter from the SEC asking me about records I may have had in my possession regarding Avenal and Wasco, and I didn't have anything," said Richard Milbrodt, president of Administrative Budget Counseling. "So I wrote them back a response, saying I have nothing in my files. I haven't heard a word since."
Milbrodt said that while First California was the underwriter for the Wasco and Avenal public financing authorities, "the cities wanted an outsider" to examine the Wildwood Estates project, and "they appointed me. I gave them a report, and I said in my judgment, [Wildwood Estates] was okay."
First California's Zellick said it is not clear what the SEC is looking for.
"Well, to be really honest, you know the SEC tells you very little about what the scope of their investigation is," Zellick said. "What I really know about this is it is an informal investigation. They are investigating these deals. That would obviously involve us [because] we were the underwriter."
Last July 15, SEC examiners "came into our office and requested documents," Zellick recalled. "It is not a subpoena. It is an informal request which we've honored. You generally attempt to do what the regulators ask."
Zellick said SEC asked for "everything that has anything to do with" the Wasco, Avenal, and Nevada County financings. The materials included transcripts that contain all legal documents such as indentures, official statements, and purchase contracts. Trading records, which indicated to whom the bonds were s01d, were also examined, he said.
"At this point it is strictly an informal investigation," he said. "They have made no comment to us yet about any of their findings. They are still researching stuff."
Zellick said the SEC request for documents could be viewed from a broader perspective.
There "is a big push by the SEC in the last two years to come into our market -- which is the municipal market -- and try to regulate that market much more than it has been in the past," Zellick said. "That is their thrust of activities at this point.
"It is a big market that's been somewhat unregulated in the past, per se, compared to corporate finance," he said. "To me, in the '80s, [the SEC] busted everybody's chops on the corporate side. I think they got it to where they felt it is really in line.
"They've now moved their sights onto our market, and primarily not because of things that people have been doing wrong, but because it never really had anybody taking a real hard look at it," he added.
Zellick said First California once was audited by the SEC in an unrelated matter, but never has been "formally sanctioned or fined or anything like that by the SEC."
First California, a 60-employee regional underwriting firm, has been one of California's biggest promoters of transactions to finance development projects using the Marks-Roos Local Bond Pooling Act of 1985.