SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16854 / January 4, 2001
SECURITIES AND EXCHANGE COMMISSION v. DAVID FITZGERALD AND PACIFIC GENESIS GROUP, INC., United States District Court for the Northern District of California, Civil Action No. C-00-4802 (CRB)
SEC CHARGES MUNICIPAL UNDERWRITER WITH FRAUD; EMERGENCY ORDER ISSUED
On December 27, 2000, the U.S. Securities and Exchange Commission filed an action in federal district court in San Francisco against Pacific Genesis Group, Inc., a municipal securities underwriting firm based in Alameda, California, and its Chairman and managing director, David Fitzgerald, for fraud in connection with a series of bond offerings to finance a residential development in southern California. As part of the action, U.S. District Court Judge Vaughn Walker issued an order against Pacific Genesis and Fitzgerald that requires them to put the proceeds of another planned offering for the project in escrow, pending a further hearing on the Commission's action.
In its court filings, the Commission alleged that Pacific Genesis and Fitzgerald have underwritten over $70 million in tax-exempt municipal bonds to finance the Rancho Lucerne Master Planned Community, about 50 miles northeast of the City of San Bernardino, California. However, according to the Commission's filings, four years after the first offering, not a single road has been paved, no homes have been built and not a single residential lot has been sold to a homebuilder. The Commission alleges that Pacific Genesis and Fitzgerald intentionally or recklessly misrepresented or omitted material facts in the offering documents concerning the value of the land used as security for the bonds, the status of the project and the likelihood that the bonds would be repaid from the revenues of the project. By this conduct, the Commission alleges, Pacific Genesis and Fitzgerald violated Section 17(a) and the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. In addition, the Commission alleges that Pacific Genesis violated Section 15B(c)(1) of the Exchange Act and Municipal Securities Rulemaking Board Rule G-17.
In particular, the Commission alleges that Pacific Genesis and Fitzgerald knew or recklessly disregarded the fact that an appraisal they used as the basis for the financings was materially false and misleading. Beginning in the late 1980s, the developer of the project acquired land in the area for an average of $1,564 an acre, the Commission alleges. However, in financing the land, Pacific Genesis and Fitzgerald relied on a materially false appraisal that drastically over estimated the value of the land involved in the development. Based on this false appraisal, the Commission alleges, Pacific Genesis and Fitzgerald fraudulently misled investors about the value of the land that secures the bonds, using land that is worth less than $5 million to underwrite some $70 million in debt financing.
As part of the action, the Commission sought a temporary restraining order against Pacific Genesis and Fitzgerald in connection with a planned $13.5 million offering for the project that was scheduled to close before December 31, 2000. Judge Walker granted the order, directing that if Pacific Genesis proceeds with the offering, it must maintain all of the offering proceeds in an escrow account pending a hearing on the Commission's order for a preliminary injunction, scheduled for January 5, 2001.