U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22362 / May 9, 2012
Securities and Exchange Commission v. Kwame M. Kilpatrick, et al., Case No. 12-cv-12109 (E.D. Mich.)
SEC CHARGES FORMER DETROIT OFFICIALS AND INVESTMENT ADVISER TO CITY PENSION FUNDS IN INFLUENCE PEDDLING SCHEME
The Securities and Exchange Commission (“Commission”) today charged former Detroit mayor Kwame M. Kilpatrick, former city treasurer Jeffrey W. Beasley, and the investment adviser to the city’s public pension funds involved in a secret exchange of lavish gifts to peddle influence over the funds’ investment process.
The Commission’s complaint alleges that Kilpatrick and Beasley, who were trustees to the pension funds, solicited and received $125,000 worth of private jet travel and other perks paid for by MayfieldGentry Realty Advisors LLC, an investment adviser whose CEO Chauncey Mayfield was recommending to the trustees that the pension funds invest approximately $117 million in a real estate investment trust (REIT) controlled by the firm. Despite their fiduciary duties, neither Kilpatrick and Beasley nor Mayfield and his firm informed the boards of trustees about these trips and the conflicts of interest they presented. The funds ultimately voted to approve the REIT investment, and MayfieldGentry received millions of dollars in management fees.
According to the Commission’s complaint filed in U.S. District Court for the Eastern District of Michigan, members of Kilpatrick’s administration began to exert pressure on Mayfield in early 2006 after he supported Kilpatrick’s opponent in his 2005 re-election and hired that candidate’s daughter at MayfieldGentry. The complaint alleges that Beasley met with Mayfield in February 2006 and told him he was “in the dog house” with Kilpatrick and offered to help him “clear the air.” Throughout 2007, Mayfield appeared before the boards of trustees for Detroit’s public pension funds recommending the REIT investment.
Meanwhile, the complaint alleges, MayfieldGentry began footing the bills for trips taken by Kilpatrick, Beasley and others that extended beyond business. In January 2007, Beasley demanded and Mayfield agreed to pay more than $3,000 for hotel rooms in Charlotte, N.C. for Beasley, Kilpatrick, and others. According to the complaint, Beasley told Mayfield that the reason for the trip was to inspect a building recently acquired by one of the pension funds, but in fact Beasley and Kilpatrick never inspected the building. Mayfield knew that Beasley and Kilpatrick never inspected the building, but did not ask any further questions about the matter.
According to the Commission’s complaint, the non-business travel continued:
The Commission alleges that neither Kilpatrick nor Beasley nor Mayfield nor MayfieldGentry told anyone associated with the pension funds about any of the travel. The boards of trustees for the funds thus voted to invest approximately $117 million with Mayfield and his firm without the knowledge that they had supplied Kilpatrick, Beasley, and their associates with the extravagant travel and perks during the preceding 10 months.
The Commission’s complaint alleges that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a), 10b-5(b) and 10b-5(c) thereunder. The Commission also alleges that MayfieldGentry and Chauncey Mayfield violated Sections 17(a)(1), 17(a)(2) and 17(a)(3) of the Securities Act of 1933. In addition, the Commission charges that MayfieldGentry and Chauncey Mayfield violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and Kilpatrick and Beasley aided and abetted those violations. The Commission seeks disgorgement of ill-gotten gains, penalties, and permanent injunctions, including an injunction against Kilpatrick and Beasley to prohibit them from participating in any decisions involving investments in securities by public pensions.
The Commission’s investigation, which is continuing, has been conducted jointly by the Chicago Regional Office led by Merri Jo Gillette and Timothy L. Warren, the Enforcement Division’s Asset Management Unit led by Bruce Karpati and Robert Kaplan, and the Municipal Securities and Public Pensions Unit led by Elaine C. Greenberg and Mark R. Zehner. The investigative attorneys are Brian D. Fagel, Rebecca R. Goldman and Eric A. Celauro, led by Assistant Directors Peter K.M. Chan and John J. Sikora, Jr. The Commission’s litigation will be led by Timothy S. Leiman and John E. Birkenheier.