Release No. 7537 / May 5, 1998


File No. 3-9542

In the Matter of





The Securities and Exchange Commission ("Commission") has previously instituted a cease-and-desist proceeding pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against the City of Ione ("City of Ione"). 1 Ione subsequently has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept.


Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained herein, except that Ione admits the jurisdiction of the Commission over it and over the subject matter of this proceeding, Ione consents to the issuance of this Order Making Findings and Imposing a Cease-and-Desist Order ("Order") and to the entry of the findings and the imposition of the relief set forth below.


On the basis of this Order and Ione's Offer, the Commission finds2 2 the following:


City of Ione is a political subdivision and legal subdivision of the State of California invested with corporate powers.


The Mello-Roos Bond Act

The California Mello-Roos Community Facilities Act of 1982 (the "Mello-Roos Act")3 3 authorizes municipalities to organize community facilities districts ("CFDs") to finance the building of infrastructure. Mello-Roos bonds are paid off through special taxes levied on the property being developed. The bonds are not personal debts of the landowners or general obligations of the issuing municipality. Because they are paid off using future real property tax levies, the bonds' financial attractiveness depends upon the underlying value of the land being developed, the contemplated improvements to the land and the developer's ability to carry out the contemplated improvements.

Ione wanted to finance the infrastructure for a 460-acre real estate development project called Castle Oaks Country Club Estates ("Castle Oaks"), consisting of a residential subdivision, a golf course, and other recreational and commercial uses. The underwriter, First California Capital Markets Group, Inc. ("First California"), recommended that Ione issue two series of Mello-Roos bonds to finance the infrastructure. The first series, Ione CFD-1, was initially designedto be used to finance the development of the Castle Oaks golf course, which was to be owned by Ione, but leased to a private, for-profit operator. Because that lease arrangement would haveprevented that series of Mello-Roos bonds from being tax free, the Ione CFD-1 offering was delayed for several months, and its purpose was changed to provide financing for certain infrastructure. The second series, Ione CFD-2, was to be used to develop certain other infrastructure at Castle Oaks. Because of the delay in issuing the Ione CFD-1 bonds, the Ione CFD-2 bonds were actually issued first.

The Ione CFD-2 Offering in February 1991

On February 14, 1991, First California underwrote $7.5 million in Ione CFD-2 bonds under the Mello-Roos Act. The Ione CFD-2 Official Statement described public and private improvements that would be made at the Castle Oaks project through bondfinancing andprivate financing. That description was false and misleading because there was a significant shortfall in financing for the proposed project that was not disclosed in the CFD-2 Official Statement.

After the Ione CFD-2 bonds were issued, Ione noticed that the tentative map had not been drawn in conformity with the minimum lot size requirement set forth in the Development Agreement between Ione and the developer. When the lot size was recalculated, the development had only 584 single family lots rather than 667 as originally calculated and represented in the Ione CFD-2 Official Statement.

The Ione CFD-1 Offering in June 1991

On June 6, 1991, in a separate underwriting, First California underwrote $6.55 million of Ione CFD-1 bonds under the Mello-Roos Act. The Ione CFD-1 Official Statement represented that the build-out value of the Castle Oaks Project was $44,906,000, an amount that appeared to satisfy the 3-to-1 value-to-lien ratio for the $14.05 million in total bonds (CFD-2 and CFD-1) then issued. The value was based on an appraisal prepared by William McKay.

This representation was false and misleading. The $44,906,000 appraisal was almost $3 million higher than an appraisal prepared the previous year, despite the fact that in the one year intervening period the number of single family lots in the project had been reduced from 667 to 584 and real estate values in California had declined. In addition, the $44,906,000 appraisal was based on the assumption that part of the land would be developed into 90 high-density single family lots. That assumption, however, was not part of the developer's immediate plans, did not meet the required minimum square foot requirements, had not been approved, and lacked any then-developed market.

The Ione CFD-1 Official Statement failed to disclose that the Castle Oaks Project lacked sufficient capital to finance the planned development. The estimated cost of the infrastructure and golf course was between $25 and $30 million. Ione agreed to raise approximately $14 million by issuing bonds, and the developer was to bear the balance of the construction costs from its own private funding sources. The developer had obtained a $10 million construction loan from a foreign bank. Of that amount, $6.5 million was soon diverted by the developer to another company, leaving a substantial shortfall in private financing for the project. Ione was not informed about the diversion of funds until March of 1992.

On October 6, 1994, due to the developer's failure to pay special taxes, Ione announced that there were no funds to make the October 1, 1994, interest and principal payments on the Ione CFD-1 and CFD-2 bonds and that the bonds were in default. Not a single lot had been sold. The construction lender foreclosed on the property. After the construction lender was unable to sell the property at two successive foreclosure sales and failed to bring the special tax bonds current, Ione foreclosed on the property. On December 1, 1995, Ione sold the property to an investment group for $3.3 million at a sheriff's auction.


Section 17(a) of the Securities Act generally prohibits misrepresentations or omissions of material facts in the offer or sale of securities. Scienter is not required to establish a violation of Section 17(a)(2) or Section 17(a)(3) of the Securities Act. Aaron v. SEC, 446 U.S. 680, 702 (1980).

While offering and selling its bonds to the public, Ione represented that the Castle Oaks Project was a financially viable project and therefore that the bonds were a secure investment. This representation was false and misleading in light of available cost estimates, errors in the tentative map and appraisals, and the developer's lack of sufficient funds for the project.

The misrepresentations contained in the Ione Official Statements were material to investors because they directly addressed the security of the bonds. These misrepresentations significantly altered the total mix of information available to the investors.

The misrepresentations contained in the Ione Official Statements were "in the offer or sale" of the bonds. All were designed to induce investors to purchase the bonds. There was a causal nexus between the statements made and the investors' decisions to buy the bonds.

Even though it retained and relied upon professional financial and legal advisers and appraiers, Ione was responsible under Sections 17(a)(2) and 17(a)(3) for any misrepresentations and/or omissions in the CFD-1 and CFD-2 Official Statements. The Ione City Council approved both Official Statements.


Based on the foregoing, the Commission finds that Ione committed violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act.


Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act, that Ione cease and desist from committing or causing any violation and any future violation of Sections 17(a)(2) and 17(a)(3) of the Securities Act.

By the Commission.

Jonathan G. Katz


1 The Commission instituted the cease-and-desist proceeding on February 2, 1998. See Securities Act Rel. No. 7503; Securities Exchange Act Rel. No. 39612.
2 The findings herein are made pursuant to Ione's Offer and are not binding on any other person or entity in this or any other proceeding
3 See Article 1, Chapter 2.5, Division 2, Title 5 of the California Government Code (§§ 53311, et seq .).