Allen Park to settle fraud case over failed studio

David Shepardson
Detroit News Washington Bureau

Washington — The downriver suburb of Allen Park — pushed into a state takeover of its finances by a disastrous failed movie studio project — settled a three-year investigation Thursday into its sale of $31 million in bonds for the project.

The U.S. Securities and Exchange Commission on Thursday announced the deal along with settling civil fraud charges against the city's former mayor and city administrator.

An SEC investigation found that documents provided to investors during Allen Park's sale of $31 million in general obligation bonds "contained false and misleading statements about the scope and viability of the movie studio project as well as Allen Park's overall financial condition and its ability to service the bond debt."

The studio project collapsed within months after the second set of bonds were issued, and Gov. Rick Snyder appointed an emergency manager for the city in October 2010, citing the failed project as a primary factor in the city's deteriorating economic condition.

The project came amid a flurry of film industry activity after Michigan in 2008 adopted a 42 percent tax credit that refunded a substantial portion of any money producers spent in-state — an effort intended to create jobs and infuse money into the state's ailing economy. Other studios and production facilities were planned in Detroit and Pontiac.

When Snyder took office, he worked to limit the film incentives, changing them from tax credit to a pot of $25 million total for incentives. The Legislature bumped that up to $50 million.

The city, former Mayor Gary Burtka and former city administrator Eric Waidelich have agreed to settle the SEC's charges, the commission said. Burtka will pay a $10,000 penalty.

"Municipal bond disclosures must provide investors with an accurate portrayal of a project's prospects and the municipality's ability to repay those who invest," said Andrew J. Ceresney, director of the commission's Enforcement Division. "Allen Park solicited investors with an unrealistic and untruthful pitch, and used outdated budget information in offering documents to avoid revealing its budget deficit."

Allen Park's current mayor, William Matakas, said in an interview the city's attorneys had recommended a settlement. The project — approved before he took office — was "careless in producing documents that they weren't used to dealing with. The city was actually going into business. They weren't thinking about the risks they had to avoid," he said.

The city recently sold the property to a New York investment firm for $12 million on a seven year land contract. Some companies have facilities as part of the campus and the developer is trying to land a hotel developer.

The city has been losing $300,000 annually on the project — and with the bond costs — it has accounted for $3 million of the city's $18 million annual budget.

Matakas said the city will lose about $16 million on the project but is trying to refinance its debt that should save about $200,000 annually in lower interest costs over the 20-year life of the bonds.

In September, Snyder announced the end of nearly two years of the city's finances being run by an emergency manager — but the city remains in receivership and a four-person board will continue to oversee its finances for at least one more year.

Part of the SEC settlement is the city has agreed to improve its disclosure processes. The city has filed proposed budgets through 2016 that show expected surpluses, but faces a lawsuit from retirees over health care changes.

The city has made 10-percent reductions in pay for employees, eliminated vacant positions, consolidated healthcare plans from five to two and increased co-pays and deductibles.

U.S. District Judge Avern Cohn on Thursday approved the civil settlement involving the former mayor.

Burtka signed the SEC agreement last month, without admitting or denying the allegations, according to court records. A Birmingham lawyer for Burtka, Gary Saretsky, didn't immediately return a call seeking comment.

Waidelich's proposed settlement is pending before U.S. District Judge Terrence Berg. He also consented to the deal without admitting or denying the allegations in court documents. His lawyer, Mark Mandell, said his client is "happy to put this behind him."

Mandell said it was "clear nobody involved had any criminal intention to deceive anybody."

In the end, Allen Park had good intentions but it didn't work. "I think Allen Park was seeing Hollywood stars," he said.

The movie studio project was initially billed as a $146 million full-service film and media production facility that would employ thousands of unionized, skilled workers, be located on 104 acres, consist of 750,000 square feet of facilities including eight sound stages, and be led by a Hollywood production executive. The SEC complaint said the city put out false statements in press releases about the project and misled rating agency Standard & Poors.

The SEC found by the time the bonds were issued, Allen Park's plans to implement and pay for the studio project had deteriorated into merely building and operating a vocational school on the site.

"Yet none of these plan changes were reflected in the bond offering documents or other public statements, which continued to repeat the original plans for the movie studio project. Investors were left uninformed not only about the deterioration of the project itself, but also the substantial impact it would have on the city's ability to service the bond debt," the SEC said.

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Detroit News Staff Writer Mark Hicks and The Associated Press contributed.