Cook County Record

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Harvey mayor to pay $10K to settle SEC complaint over misuse of city's muni bonds

By Scott Holland | May 20, 2016

Law money 07

The mayor of Harvey has quickly agreed to pay a $10,000 fine as part of a settlement reached with the federal Securities and Exchange Commission, ending a legal action the financial watchdog agency launched over allegations the suburban city had improperly steered nearly $2 million in investors’ money away from an advertised hotel development project to the city’s general coffers.

On May 19, the SEC announced in a release that it had reached the settlement with Harvey Mayor Eric J. Kellogg. The release came the same day the SEC formally filed its allegations in a complaint in Chicago federal court. Kellogg has served as the mayor of the suburban Cook County community since 2003.

The complaint centered on three municipal bond offerings Harvey had posted in 2008, 2009 and 2010, totaling about $14 million. The money was supposed to help develop and build a hotel in the community, “but instead city officials diverted at least $1.7 million in bond proceeds to fund the city’s payroll and other operational costs unrelated to the hotel project,” per the SEC release.

According to the court filing, the bonds were supposed to be paid from dedicated revenue streams like the city’s hotel-motel tax, sales tax or revenue from the tax increment financing district encompassing the hotel. These kinds of bonds differ from general obligation bonds, which can be repaid from general funds and used to fund basic operations.

According to the release, Kellogg agreed to settle the charges without admitting or denying the SEC’s allegations. Under the settlement, which is subject to court approval, Kellogg will pay a $10,000 fine and abstain from all future municipal bond offerings.

“Investors were told one thing while the city did another, and Kellogg was in a position to control the bond issuances and prevent any fraudulent use of investor money,” said LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Public Finance Abuse Unit.

“His days of participating in muni bond offerings are over.”

In its filing, the SEC alleged Harvey’s former comptroller “received approximately

$290,000 in undisclosed payments derived from bond proceeds and other proceeds

earmarked for the hotel redevelopment project.” It further alleged the city “made misrepresentations and omissions to investors about how bond proceeds would be

used and the risks associated with investments in Harvey’s municipal bonds.”

Kellogg, 60, was a city alderman from 1991 to 2003 before being elected Mayor; he won his fourth term on April 7, 2015. Based on his control of the city, Kellogg is liable for fraud as a control person under Section 20(a) of the Securities Exchange Act, the SEC said.

The SEC said the city’s actions with respect to bond money “has turned into a fiasco for bond investors and Harvey residents. According to news reports, the proposed Holiday Inn hotel and conference center stands as an unfinished decrepit shell.”

The hotel property is at 17040 S. Halsted St., and was to be converted into “a full-service Holiday Inn hotel and conference center which would include, among other things, 239 rooms, a restaurant and lounge, an indoor pool, and 10,500 square feet of meeting space.”

SEC lawyers involved in the complaint include Eric M. Phillips, Brian D. Fagel, Eric A. Celauro and Sally J. Hewitt, of the SEC’s Chicago office.

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U.S. Securities and Exchange Commission