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SEC Steps In to Stop Sketchy City Comptroller From Bankrupting City on Bad Bond Deals

The city of Harvey, IL has angered the SEC with some shady bond offerings to the point that the SEC felt it appropriate to obtain an emergency court order to stop these clowns from issuing these bonds:

The SEC has filed fraud charges in U.S. District Court for the Northern District of Illinois against the city of Harvey, Ill., and Joseph T. Letke alleging that they have been engaging in a scheme for the past several years to divert bond proceeds for improper, undisclosed uses.  The SEC’s complaint alleges that the purported purpose of prior bond offerings was to fund the development and construction of a Holiday Inn hotel in Harvey.  However without informing investors, Harvey officials diverted at least $1.7 million of bond proceeds from these offerings to pay the city’s operational costs such as its payroll, and Letke received approximately $269,000 in undisclosed payments derived from bond proceeds.  While investigating Harvey’s past bond offerings to investors, the SEC learned that the city is intending to issue new limited obligation bonds as early as this week, and draft offering documents make materially misleading statements about the purpose and risks of those bonds while omitting that past bond proceeds have been misused.

Judge Rebecca Pallmeyer conducted an emergency hearing today, issuing a temporary restraining order that bans Harvey from offering or selling bonds through July 14. The court scheduled another hearing for July 8.

“We moved quickly to stop this city and its comptroller from issuing more bonds under false pretenses,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “We will continue to aggressively pursue municipalities and public officials who raise money through fraudulent bond transactions that harm both investors and residents.”

David Glockner, director of SEC’s Chicago Regional Office, added, “Harvey’s bond investors were misled into believing their money would go toward construction of a Holiday Inn when instead the bulk of it was diverted into Harvey’s general coffers and Letke’s pocket.  Our action has stopped their scheme in its tracks, and we will continue our investigation to determine additional facts surrounding the misconduct.”

According to the SEC’s complaint, instead of general obligations bonds that are repaid from the general coffers of a municipality, Harvey’s bond offerings in 2008, 2009, and 2010 were limited obligations bonds that were to be repaid from dedicated tax revenue streams such as Harvey’s hotel-motel tax, sales tax, or incremental tax from the Tax Increment Financing District that the city created for the development and construction of the Holiday Inn project.  Therefore, it was important to bond investors that the bond offerings were consistent with the stated purpose and the money raised was actually used to fund the hotel development, because the amount of funds available to repay the bonds derived from tax revenues would be materially affected by the funding and progress of the project.

However, the SEC alleges that Harvey’s bond investors were materially misled about the purpose and risks of the bonds they purchased from the city.  As Harvey and Letke perpetrated the scheme to divert bond-related proceeds, the hotel redevelopment project turned into a fiasco for bond investors and city residents. According to news reports, the proposed Holiday Inn hotel and conference center stands as a decrepit shell. The hotel’s façade has many holes in it, and the interior of the hotel appears gutted in places with dangling wires and exposed studs.

You will note that Letke serves as comptroller of the City of Harvey, as well as others for whom he also provides accounting services, according to the SEC's complaint:

Letke is a certified public accountant who is the principal shareholder of several professional service businesses, including Alli Financial and Public Funding Enterprises. Alli Financial was formed on May 1, 2013, as a successor corporation to Letke & Associates. Letke also formed Public Funding Enterprises and Public Funding Group, LLC, which both were registered municipal advisors and provided financial advisor services regarding the issuance of municipal bonds to the City of Harvey and other municipalities.

Alli Financial provides accounting and financial consulting services to private and municipal clients, mostly in the south suburbs of Chicago. Letke serves as the comptroller for several of these municipalities, including the City of Harvey, and is responsible for the accounting and financial reporting of the municipalities in which he holds that position, as well as advising on the municipalities’ revenues, expenditures and general financial condition. Alli Financial has accountants onsite at several municipalities to provide accounting and comptroller services, and Alli Financial normally bills the municipalities on an hourly basis.

During the period 2008 to 2010, the City of Harvey has paid Letke and/or his businesses a total of approximately $1.08 million for work as Harvey’s Comptroller and for bookkeeping.

In a failed hotel deal that cost Harvey $20 million, Letke served as comptroller to the city as well as accountant to the developer, who is now in India living in shame:

Harvey officials have said rehabbing the large hotel would help spark a rebirth for the city. They gave about $10 million to a developer with a history of money problems but a close relationship with City Hall.

The money is gone now.

The community is left with the shell of a hotel in foreclosure and numerous unanswered questions. Harvey officials have failed to produce records, requested under state open-records laws, accounting for where the money went. City borrowing for the project could ultimately cost taxpayers $20 million, according to loan documents.

Harvey Ald. Joseph Whittington summed up the frustration: "I believe we got screwed."

We've reached out to a few sources to get more info on that deal and are waiting to hear back from the SEC, we'll update when that happens. As is, this is clearly a way bigger deal that just a few bad bond offerings and diverting of funds.