Court weighs judgment request in SEC's case against muni advisor

BY SourceMedia | MUNICIPAL | 08/09/22 02:41 PM EDT By Connor Hussey

A federal judge is weighing a request for summary judgment in favor of Brandon Comer, in response to the Securities and Exchange Commission's allegations that Comer and his firm breached their fiduciary duty in connection with a 2015 bond offering by the Harvey, Illinois Public Library District.

The SEC is opposing that motion, and if it is denied the case would continue headed toward the trial process. The case goes back several years, and hinges on whether Comer failed to provide a proper standard of care for the district, or whether the deal was "tainted" by association with Harvey, which had suffered a string of high profile setbacks.

In his motion, Comer argued that he provided valuable services to the district and informed them that the outcome would not be as favorable as hoped. But the SEC told the court that this defense was "meaningless" as an answer to the SEC's accusations.

In 2014, the Harvey Public Library District, which operates independently from the City of Harvey, was readying a bond issue as part of its library expansion and modernization project.

According to the SEC the district is a small, unsophisticated issuer that relies heavily on the expertise of financial professionals. It brought on Alvin Boutte of IFS, a man who knew some of the issuers' board members, to assist in its underwriting, an unusual move as typically the municipal advisor decides the underwriter.

He then brought on Mississippi-based Comer Capital Group to serve as municipal advisor. Comer sought a flat $20,000 for the arrangement, but agreed to accept $15,000 when interviewed by the board. Comer then negotiated with Boutte and after raising the issue with one of the district's trustees, they agreed to increase his compensation to $40,000.

IFS' experience in underwriting was limited, as they'd acted as sole underwriter or as the lead for a syndicate only a handful of times and had never underwritten long-term credit-rated municipal bonds. The firm also had no experience in pricing bonds.

"Despite the fact that the bonds were insured, investment grade, and bank-qualified, IFS had difficulty in finding buyers due to insufficient investor outreach and other missteps during the offering process," the SEC said.

IFS bungled the offering period not only by waiting until the offering date to begin contacting initial buyers, but also by not preparing a sales memorandum for circulation to potential buyers, and not confirming the bond's insurance at the time of offering. In a flurry, IFS contacted broker-dealer FTN and sold the bonds at a 5.05% yield, far above market value.

As the bonds made their way through the secondary market, the yields fell significantly to 4.3% and then to 4%, following the sale of the bonds by PTC to six small banks in February 2015.

In June 2019, the Commission then charged Comer Capital Group and Brandon Comer with a breach of the fiduciary duty in its failure to protect the Harvey Public Library District in the $6 million bond offering.

Comer then responded swiftly, claiming the bond offering was tainted by the financially troubled City of Harvey and that he had no control over the district.

In his motion for summary judgment, Comer argued that the evidence indicates that he in fact did assist in determining the appropriate pricing for the bonds, conducted analysis on transactions to determine pricing levels, and advised the district that the yield on the bonds would be higher than expected. Comer also claimed that it was only because of him that the bonds obtained its investment grade rating, among other claims.

In attacking Comer's motion for summary judgment, the SEC fired back at his assertions.

"The crux of defendants' position to the contrary seems to be the notion that they did some beneficial work for the district (more than they initially expected to do) such as helping the district obtain a rating and insurance and therefore earned their (ultimately higher) fee. But as an answer to the SEC's well-supported claim, this is meaningless," the SEC said. "The fact that defendants performed some, but not all, of the functions they promised or otherwise owed to the district is no defense, let alone an absolute defense warranting judgment as a matter of law."

"Construing the evidence and the factual inferences arising from the evidence in the light most favorable to the SEC, defendants' motion falls well short of the well-established standard for summary judgment," the SEC said. "Defendants have not met their threshold burden of showing the absence of a genuine dispute as to material facts."

Comer's lawyer James Kopecky did not respond to requests for comment.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.