WASHINGTON -- The parties to an SEC enforcement action brought in connection with seven housing bond issues in Mississippi will meet on Aug. 29 to set a date for a trial-like hearing, lawyers involved in the case said yesterday.
The Securities and Exchange Commission brought fraud charges last month against the underwriting firm of Thorn, Alvis, Welch Inc.; its president, John E. Thorn Jr.; and bond counsel Derryl W. Peden, a lawyer with Stennett, Wilkinson & Peden, in connection with almost $20 million of multifamily housing bonds that were sold by Hinds and Warren counties in 1992 and 1993.
The SEC claims that Thorn, his firm, and Peden paid a contractor more than $1 million from bond proceeds, which were then, in effect, kicked back to them when the contractor paid issuance costs in violation of tax law limits.
As a result, the SEC charges, the bond offering documents erroneously disclosed that the contractor had made "contributions" to the projects and failed to disclose that the bonds might be taxable because of tax law violations.
The underwriter and bond counsel are disputing the SEC charges. They say the deals did not violate securities or tax laws. They contend the SEC charges are improper because they stem from tax law issues that are the jurisdiction of the IRS and not the SEC.
SEC officials, Thorn, and Peden will hold a pre-hearing conference on Aug. 29 to decide several procedural issues such as the date of the hearing and whether they can agree on certain facts in the case.
At the hearing, which is expected to be held later this year, an SEC administrative law judge will determine whether the underwriter and bond counsel are guilty of the charges and, if they are, what sanctions should be imposed.
Judge Brenda Murray has been assigned to the case, according to the lawyers.
The SEC charges revolve around two tax law limits. One limits to 2% the amount of bond proceeds that can be used to pay issuance costs in multifamily housing and other private-activity bond deals. The other limits to 5% the amount of privateactivity bond proceeds that are not used for the tax-exempt purpose of the bonds.
In the seven Mississippi deals, the tax-exempt bonds were being used to finance the acquisition and rehabilitation of low-income housing projects.
The SEC contends that the bond proceeds that were paid to the contractor and then used to pay issuance costs pushed the issuance costs above the 2% limit and the so-called nonexempt purposes costs above the 5% limit.
But Thorn and Peden claim that once the contractor received the bond proceeds for services rendered, the bond proceeds were spent under tax law purposes. The contractor could then use the money for anything, including as contributions to the partnerships developing the projects in the form of payments of issuance costs that were not paid with bond proceeds.