U.S. Securities and Exchange Commission
Litigation Release No. 18315 / August 28, 2003
Securities and Exchange Commission v. Terry Richard Martin, Silver Legacy Corporation, Silver Sound LLC, Jonas David Smith, Michael W. McCall, Charles J. Tull, Ibis Securities LLC, Kenneth R. Martin, George Tamura, Goldman Sig, Inc., Edward L. Tezak, Signal Mortgage Inc., and John H. White
United States District Court for the Western District of Washington, Civil Action No. C 03-2646 C
The Securities and Exchange Commission today announced the filing of civil charges relating to the fraudulent sale of $20 million in municipal bonds for the Holmes Harbor Sewer District, a small sewer district located on Whidbey Island, approximately 60 miles north of Seattle, Washington. The bonds were intended to finance the building of certain public purpose portions of a private office-building complex. However, according to documents filed in court, the developer and others lied to investors about how bond proceeds would be used to acquire land for the project; falsely claimed that a prominent investment bank was involved in providing additional private financing for the project; falsely claimed that the project was already fully leased to a "Triple A" credit-rated company; and failed to disclose kickbacks to several of the offering participants.
Currently, the bonds are in default and no substantial work has taken place on the project. When the bonds were sold to investors in October 2000, approximately half of the proceeds were used to acquire land and for professional fees. The balance of the proceeds remains in escrow.
Named in the Commission's complaint were Terry Martin of Mukilteo, Washington, the controlling shareholder of the project's developer; J. David Smith of Edmonds, Washington, the developer's attorney; John H. White of Stanwood, Washington, and Edward L. Tezak of Sheridan, Montana, who were involved in arranging private financing for the project; Signal Mortgage, Inc., a Washington state mortgage broker of which John H. White was a vice president and part owner; Michael McCall of Elk Grove, California, and Charles Tull of Bellingham, Washington, attorneys who represented Holmes Harbor Sewer District in the bond sale; and Ibis Securities of Walnut Creek, California, the underwriter of the bonds; Ibis principals Kenneth Martin of Concord, California, and George Tamura of San Leandro, California.
According to the complaint, the bonds were sold to investors in October 2000 based on information contained in an Official Statement, a written offering document that explains key features and risks for a bond offering, that the developer, attorneys and underwriter each either drafted or reviewed. The Official Statement contained several material misrepresentations and omissions, including the following:
Use of Proceeds to Acquire Land: According to the Official Statement, $6.2 million in bond proceeds would be used to acquire 15 acres of land for certain public purpose portions of the project. This claim was false. In fact, the developer used $6.2 million in bond proceeds to acquire a total of 39.9 acres, which included land for both the public and private purpose portions of the project.
Involvement of Prominent Investment Bank: The Official Statement represented that an entity called Goldman/Sig LLC had agreed to be a participating mortgage lender for the project. According to the Official Statement, Goldman/Sig LLC was formed by Goldman Sachs, Private Client Services, along with Signal Mortgage. This claim was false. Goldman Sachs, Private Client Services had no involvement with the bonds or the project, and did not participate in the formation of Goldman/Sig LLC.
Existence of Construction Financing for Project: The Official Statement represented that the developer had entered into an agreement with Goldman/Sig to "fund infrastructure construction and office building construction through completion and provide long-term mortgage financing." This statement was false and misleading because Goldman/Sig had no ability to provide the nearly $65 million in financing required to complete the project.
Value of, and Existence of Lease Agreement for, the Project: According to an appraisal contained in the Official Statement, at the time the bonds were sold the developer had entered into a lease agreement covering the entire property with a single, unidentified tenant with a "Triple A (corporate) credit rating." Based on this information, the appraisal concluded that the project when built would have a value of $90 million. This claim was false and misleading. In fact, the developer had entered into an agreement with a small firm with a total of six employees and annual revenues of approximately $600,000, and no capacity to meet the projected monthly lease payments for the six buildings to be constructed in the project. Moreover, the Official Statement failed to disclose that the developer had entered into a side agreement that allowed the lessee to cancel the lease at any time.
Undisclosed Payments to Offering Participants: The Official Statement disclosed that bond proceeds would be used to pay $100,000 to attorney Tull's law firm and $140,000 to attorney McCall's law firm for their work in providing legal opinions on the bond offering. However, the Official Statement failed to disclose that on the day the bond offering closed, the developer used bond proceeds to make additional payments of $60,000 to Tull and $45,000 to McCall. The Official Statement also failed to disclose that shortly after closing the developer used bond proceeds to make a $200,000 payment to underwriter Ibis and a $50,000 payment to Tezak, who was purportedly involved in obtaining private financing for the project.
The Commission's complaint charges Terry Martin and two of his corporate entities (Silver Legacy Corporation and Silver Sound LLC), as well as Smith, McCall, Tull, Kenneth Martin and Tamura with fraud in the offer and sale of securities, in violation of Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exhange Act") and Rule 10b-5 thereunder.
In addition, the complaint charges that Tezak, White, Signal Mortgage and Goldman/Sig violated Section 17(a) of the Securities Act and violated or aided and abetted violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Finally, the complaint charges that Ibis violated Section 17(a) of the Securities Act, and Municipal Securities Rulemaking Board Rule G-17, and Sections 10(b) and 15B(c)(1) of the Exchange Act and Rule 10b-5 thereunder. The Commission seeks permanent injunctions prohibiting future violations against each defendant, as well as the return of all monies received as a result of the fraud plus pre-judgment interest, and civil money penalties.
In a separate action, the Office of the U.S. Attorney for the Western District of Washington also announced the filing of criminal charges against Terry Martin, Smith, White and Tezak for their roles in the bond offering.