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News Release: 00-04
GRAY DAVIS, Governor
Date: 03/17/00
WILLIAM KENEFICK, Acting Commissioner
State Seeks Sanctions Against Bay Area Municipal Bond Broker
"Blatant" Violations of Prior Settlement Agreement Charged
Sacramento, March 17, 2000 — The Department of Corporations announced today that it has filed a motion in Sacramento County Superior Court against Pacific Genesis Group, Inc. (PGG), a Bay Area securities broker specializing in municipal bond offerings. The motion seeks a permanent injunction and civil penalties of $300,000 for "blatant" violations of a previous settlement agreement.
The motion, filed by the department on March 17, 2000, alleges that the defendants failed to make the specific disclosures required by the settlement agreement (and by law) in connection with raising $20 million from at least 130 investors in two recent municipal bond offerings underwritten by PGG in San Bernardino County. The offerings sought to raise capital to salvage the troubled Rancho Lucerne Golf Course Community, a proposed "master planned . . . premiere resort community" with 4257 single family lots on 1375 acres and a 27-hole "centerpiece" golf course.
According to state regulators, the action is necessary to enforce the terms of the original settlement that required the disclosure of pending liens and foreclosure lawsuits filed against developers involved in the municipal bond projects. The recent municipal bond offerings underwritten by PGG failed to disclose over $2 million in liens and/or foreclosure lawsuits filed by the primary contractor and eight other contractors against the property securing the development. The department’s position is that the "materially misleading" disclosure in recent offerings shows "recidivist behavior" on the part of the defendants. This failure is a breach of the settlement agreement and "puts millions of dollars of the public’s money at risk."
Just over one year ago, on February 18, 1999, the defendants stipulated to a settlement in which they agreed to an order prohibiting them from committing securities fraud in the future. At that time they agreed to make specific disclosures in future offerings of "material information," including pending lawsuits against the developers involved in their land-based municipal bond projects and encumbrances affecting the properties pledged as collateral for the developments.
The original lawsuit dates back to November 12, 1997, when the department sued PGG, its principal officers, two real estate developers and an attorney for securities fraud; and for offering and selling unsuitable investments to customers in connection with the marketing of highly risky land-based municipal bonds throughout the state. The department alleged an elaborate scheme to defraud public investors in these bond offerings, which relied upon the Marks-Roos Act to create rural public financing authorities to raise capital to rescue speculative real estate developments from foreclosure.
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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