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News Release: 99-03
GRAY DAVIS, Governor
Date: 03/25/99
WILLIAM KENEFICK, Acting Commissioner
Department of Corporations Settles Lawsuit Against Pacific Genesis Group
Sacramento, February 25, 1999 — The Department of Corporations today announced a settlement agreement with San Francisco-based Pacific Genesis Group in response to a November 12, 1997 lawsuit filed against Pacific Genesis Group and its principals, David Fitzgerald and Arch Zellick. According to Acting Commissioner William Kenefick, the settlement resolves issues raised by the lawsuit arising out of the firm's offerings of municipal bonds under the state Marks-Roos Act and recovers $250,000 in department costs for the investigation and litigation.
"This settlement achieves our major litigation objectives, which were to bring the defendants into compliance with the state securities laws, while putting in place a process that would ensure their future compliance," said Acting Commissioner Kenefick. "The court retains jurisdiction to enforce the terms of the settlement, which we believe is fair to both parties and preferable to protracted litigation."
Under the settlement, the defendants (i) stipulated to the issuance of a Desist and Refrain order prohibiting them from engaging in fraud in connection with the offer and sale of securities and (ii) agreed to make specific disclosures in future offerings and to ensure that sales of securities were only made to customers for whom they were suitable. The court retains jurisdiction over the case for three years to carry out the provisions of the agreement (a violation of any provision of the agreement will result in a Judgement of Permanent Injunction being entered against the defendants and the assessment of $300,000 in civil penalties). The settlement was entered into without admitting or denying the allegations of the complaint.
In the lawsuit, the Department alleged that Pacific Genesis and its principals, along with two developers, Dennes Coombs and Robert Zukerman, and disclosure counsel, William Gnass:
- Failed to disclose material adverse information concerning the financial condition of developers involved in land-based revenue bond projects throughout the state, their lack of experience, bankruptcies, legal judgments and conflicts of interest and encumbrances affecting the properties and;
- Sold the risky municipal securities to investors for whom they were not suitable.
The Department's complaint alleged an elaborate scheme to defraud public investors in "revenue bond" offerings throughout California using the Marks Roos Act to create rural public financing authorities to authorize and provide legal cover to funnel investor proceeds into speculative offerings.
Broadly speaking, the Marks-Roos Act authorizes joint powers authorities to issue bonds and loan the proceeds to local agencies. Unlike other municipal bond laws, the Marks-Roos Act does not authorize the imposition of taxes or fees to be pledged to the repayment of the bonds. Instead, the Act provides an alternative method of issuing bonds secured by revenues that local agencies derive under separate authority. In January 1998, the court appointed an "Independent Reviewer" to monitor the defendants' Marks-Roos offerings and report to the Department on their underwriting disclosure activities and retail marketing practices.
On January 1, 1999, new laws went into effect in California in response to concerns that some governmental entities with no stake in offerings were inappropriately allowing the use of their authority to issue revenue bond offerings to developers for a fee. The law now requires Public Financing Authorities involved in Marks-Roos bond offerings to include at least one member from the district in which the development is going to be built.
The settlement only applies to Pacific Genesis Group and its principals and does not apply to the lawsuit against developers Robert Zuckerman and Dennes Coombs and compliance counsel William Gnass, which is continuing and which is expected to go to trial sometime this summer.
The Department of Corporations is California's Investment and Financing Authority, reporting to the Business, Transportation and Housing Agency and the Governor. The Department is responsible for the regulation, enforcement and licensing of securities, franchises, off-exchange commodities, investment and financial services, independent escrows, consumer and commercial finance lending and residential mortgage lending. For further information or to obtain a complaint form, see the Department's Web site at www.corp.ca.gov.
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