LOS ANGELES -- A small community in California has filed a lawsuit accusing First California Capital Markets Group Inc. and its chairman, H. Michael Richardson, of a "pattern of racketeering activity" for their roles in underwriting its Marks-Roos bonds.
Avenal, Calif., charged that San Francisco-based First California and Richardson violated federal law when they conducted a scheme to "defraud investors and to gain profits by misrepresenting or omitting material facts" relating to several bond transactions between 1989 and 1991.
Arch Zellick, chief financial officer for First California, said yesterday that he had "no knowledge" of the suit "and so I can't make any comment on it." Richardson was not available for comment.
The 47-page lawsuit was filed Monday in the United States District Court for the Northern District of California.
The nine-count complaint was prepared by the San Francisco-based law firm of Carroll, Burdick & McDonough on behalf of Avenal, a small city 65 miles southwest of Fresno, Calif., whose 12,000 residents include a prison population of 6,000.
The counts against Richardson and First California include a violation of the Racketeering Influenced and Corrupt Organizations Act, breach of fiduciary duty, constructive fraud, negligent misrepresentation, violation of California corporations' code sections, breach of contract, professional negligence, and civil conspiracy.
Six other defendants were also named in the suit, and they ere charged with at least three counts each, including fraud, civil conspiracy, and negligent misrepresentation.
The defendants are: Rauscher Pierce Refsnes Inc., an underwriting and financial advisory firm; William McKay & Associates, a Sacramento, Calif., land appraisal firm; attorneys Richard H. Hargrove and Daniel C. Bort; and law firms Jackson, Hargrove, Hillison & Emerich and Sturgis, Ness, Brunsell & Sperry, of Emeryville, Calif.
The litigation stems from an August 1989 issue by the Avenal public finance authority of $11 million of local agency revenue bonds, issued under the Marks-Roos Local Bond Pooling Act of 1985.
Avenal later took $1 million of the Marks-Roos proceeds and used them to buy a portion of Mello-Roos special tax bonds issued by Nevada County, Calif. Avenal also invested $1 million of the Marks-Roos proceeds in Mello-Roos bonds issued by Ione, Calif.
The Nevada County and Ione Mello-Roos bond issues subsequently defaulted. Avenal, however, continues to maintain debt service payments on its Marks-Roos issue, which is secured by a $1 million debt service reserve account held by trustee Bank of America.
But the complaint said the Nevada County and Ione defaults have cost Avenal so far "in excess of $130,000 in principal and interest payments due to them, but not paid."
Avenal will "suffer further losses of income and value" as the bonds "continue to be in default," the suit said.
The complaint blames actions by First California and Richardson for getting the city to make the ill-fated investments. The suit says First California's and Richardson's advice to Avenal "constitute multiple instances of racketeering activities in that such actions constitute offenses involving fraud in the purchase and sale of securities in violation of, among other things, Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 of the Securities Exchange Commission promulgated thereunder."
The complaint said First California and Richardson were "aided and abetted" by the other defendants named in the suit.
Market observers believe this is the first Marks-Roos case that has been formally litigated. The Bond Buyer has reported that the Securities and Exchange Commission is making inquiries into at least three Marks-Roos bond financings, including the Avenal pool.
Chip Eady, a Carroll, Burdick & McDonough municipal finance partner, said only First California and Richardson have been accused of violating the Racketeer Influenced and Corruption Act, and from them Avenal is seeking the recovery of treble damages, plus attorneys fees.
"Racketeering is obviously a very serious thing and it goes above and beyond the normal concepts of fraud and negligence and that is why it is a trebled damage statute under federal law," Eady said. "We didn't feel at this point the facts had been developed adequately to support" that count for any other defendant, Eady said.
Virginia L. Horler, a Rauscher senior vice president and managing director, said yesterday that she was unaware of the suit, but said the complaint was "so ridiculous." Rauscher was financial adviser to the Nevada County Mello-Roos transaction, but Horler said her firm "had nothing to do with where [Avenal] invested their money."
Rauscher was charged with three counts of fraud, negligent misrepresentation, and civil conspiracy.
Eady said, "I think at some point we will sit down for discussions with some of these people." He said an out-ofcourt settlement "is always a possibility in any litigation."
"Avenal, obviously, would like to see some sort of monetary recovery here," Eady said. "The nature of lawsuits being what they are, this may never go to trial, or it may go to trial in a year or two years."
Eady said his firm has been preparing the complaint for several months, and chose to file it on Monday because of "timing reasons."
"We were getting very close to the four-year statute of limitations that applies to the racketeering statute," he said. "Avenal did not want to lose its rights just through the passage of time."
At Avenal's city council meeting last Thursday, Carroll, Burdick & McDonough was appointed bond counsel and San Francisco-based Stone & Youngberg was chosen to provide investment banking services.
Eady said the council also "formally terminated" contracts with First California and Richard Hargrove.
Scott C. Sollers, Stone & Youngberg's manager of public finance, said, "We don't expect to have any role on behalf of the city relative to the litigation."
Sollers added, "We're going to have a meeting with them in early January. Our role is confined to helping them review their financial options at this stage."
