CHICAGO -- Three class action lawsuits have been filed against Hennepin County, Minn., alleging that the county defrauded bondholders by failing to adequately disclose that the county could redeem $124.5 million of outstanding revenue bonds before a 1996 optional call date.
The suits were filed earlier this month after the county allowed a letter of credit on the bonds to expire, causing a mandatory redemption. The action saved the county about $41 million in bond premiums and interest payments, according to Jim Ufer, the county's investment/debt manager. The proceeds from the original $129 million of bonds, issued in 1986, financed the construction of an incinerator.
The three suits, which are similar, were filed by attorneys for bondholders in Ramsey County District Court, according to Karl Cambronne, an attorney who filed one of them. He said the court is expected to consolidate the suits.
"The main point [of the suits] is whether the issuer of bonds can manufacture a default to escape the obligation under the terms of the bonds," Cambronne said.
The suits claim that the official statement for the bond issue was false and misleading by failing to disclose that the county might arbitrarily cause redemption of the bonds before Oct. 1, 1996, the optional call date.
The suits also say the bonds were subject to mandatory redemption only under certain nonvoluntary events, such as the permanent shutdown of the facility, loss of tax-exempt status of the bonds, and failure by defendants to secure all government permits and licenses for construction. The plaintiffs assert the bonds were subject to optional redemption only at a premium and not at any time before the optional call date.
However, the county allowed the letter of credit on the bonds to expire, which triggered the mandatory redemption of the bonds, the suits say.
Officials at Banque Indosuez, one of the banks that provided the letter of credit, refused to comment. Officials at the other bank, Credit Lyonnais, did not return phone calls.
Under the direction of the county's bond counsel, Ufer declined to comment on specifics of the case.
"The county did what it was obligated to do," Ufer said, referring to the official statement.
The cover of the official statement says "the letter of credit expires on Oct. 15, 1992, unless earlier terminated in accordance with its terms. If the letter of credit is not extended and an alternate credit facility is not provided, all outstanding Series 1986 bonds will be subject to mandatory redemption upon the termination of the letter of credit."
Ufer added that the county contends the suits are without merit, noting that the county consulted its bond counsel, Faegre & Benson and Best & Flanagan, before the bonds were redeemed. He said the county's financial adviser, Evenson Dodge Inc., was also consulted.
Bill Pentelovitch, the attorney representing the county on the suit, and officials at Faegre & Benson and Evenson Dodge Inc. declined to comment. Officials at Best & Flanagan did not return phone calls.
The $41 million of savings the county reaped from the redemption has a present value of $25 million that will allow the county "increased flexibility" in financing its future waste programs, according to Dave Lawless, the county's deputy investment/debt manager. He added that the savings may also be used to help offset increases in fees charged to waste generators that haul garbage to the county's incinerator.
The court has not set any filing dates for the county's response to the suits, pending the resolution of the county's motion to debate the venue of the case, Cambronne said.
A Ramsey County District Court judge is expected to rule Nov. 13 on the motion. The county contends that the case should be moved to Hennepin County because the bonds were issued by the county. The plaintiffs filed the suits in Ramsey County, which was considered a neutral site, Cambronne said.
Meanwhile, in an unrelated development in the state, Minnesota Auditor Mark Dayton has expressed concern about whether campaign contributions from bond firms influence Hennepin county commissioners who select underwriters for bond deals.
The Minneapolis Star Tribune recently reported that Dayton has "heard complaints from attorneys" that county board decisions to hire bond firms are "heavily weighted by campaign contributions."
According to the article, Dayton said that "those associated with the [bond] industry underwriters and bond lawyers contributed more than $70,000 at the county's request to help it pay for the annual meeting of the National Association of Counties in July, the article says.
Lisa Rotenberg, deputy state auditor, said Dayton's office expects to review the hiring of underwriters and lawyers when the state audits county contracts and bidding.
She said the Legislature passed a law during the last session that allows the state to audit Hennepin County after Jan 1. However, she noted that no funds were appropriated to enable the auditor to fulfill the task.
The state's audit of Hennepin County would mark the first one since the 1970s, when the state passed a law allowing the county to hire an independent auditor, Rotenberg said. The state currently audits all 87 counties in the state except Hennepin County.