Civic Accountability -- Honesty in Local Government I

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Mark Kindt
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Civic Accountability -- Honesty in Local Government I

Postby Mark Kindt » Sat Dec 03, 2016 4:26 pm

In January of 2015, we learned that the City had a plan that had $120 million dollars in value for our community. That number was repeated by elected and appointed city officials. It was published in our water bill inserts. It was a material representation about the financial condition of our city. Was it true or false? Or, mere hyperbole, perhaps?

Since our city participates in the municipal bond market, our city officials have to comply with the federal securities laws. These are the national laws that relate to the regulation of stocks and bonds. Our officials have a duty not to make public statements that are materially misleading or omit material information. Did they violate that duty with statements related to the future of Lakewood Hospital?

In this thread, I will explore whether our elected and appointed city officials have violated these laws. I actively encourage you to join in this review with me. We have a very easy starting point. For short, I call it the "SEC Harrisburg Release". It is a short document at the SEC website that carefully and in very direct terms explains why local public officials have a duty of honesty with respect to statements about financial conditions of their localities.

Here is the link: https://www.sec.gov/litigation/investre ... -69516.htm

Here's just a sample of what you will learn if you read this Release:

“[…] the statements of those public officials who may be viewed as having knowledge regarding the financial condition and operations of a municipal issuer should be carefully evaluated to assure that they are not materially false or misleading. […] public officials may have liability under the anti-fraud provisions of the federal securities laws for such statements.”

As we learn about these issues, our goal should be to insure accountability and honesty in our local government. It needs the help of its citizens. Especially now.

Mark


Brian Essi
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Re: Civic Accountability -- Honesty in Local Government I

Postby Brian Essi » Sun Dec 04, 2016 7:38 am

Mr. Kindt,

It seems to me that there were many additional statements made by our public officials that may have affected investor decisions in the years leading up to the hospital closure and since.

I found these passages from the Harrisburg release interesting:

"There is a substantial likelihood that a reasonable investor would consider the financial condition of the City important in making an investment decision..."

"Public officials should be mindful that their public statements, whether written or oral, may affect the total mix of information available to investors, and should understand that these public statements, if they are materially misleading or omit material information, can lead to potential liability under the antifraud provisions of the federal securities laws."

"Given this potential for liability, public officials who make public statements concerning the municipal issuer should consider taking steps to reduce the risk of misleading investors. At a minimum, they should consider adopting policies and procedures that are reasonably designed to result in accurate, timely, and complete public disclosures; identifying those persons involved in the disclosure process; evaluating other public disclosures that the municipal securities issuer has made, including financial information and other statements, prior to public dissemination; and assuring that responsible individuals receive adequate training about their obligations under the federal securities laws."

Perhaps a task force could be created to evaluate the statements made by officials and then help develop the "minimum policies and procedures" that should be established by our City to protect innocent investors.

Of course, since we are dealing with a mayor, council and administration that had trouble prioritizing "hens" vs "innocent human life", one major obstacle would be identifying "responsible individuals" within our government.

Historically, Mayor Summers, Director Butler and Director Pae have been the most reckless in their public statements and the least receptive to "listening."


“Success is not final. Failure is not fatal. It is the courage to continue that counts." Winston Churchill
Mark Kindt
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Re: Civic Accountability -- Honesty in Local Government I

Postby Mark Kindt » Sun Dec 04, 2016 11:40 am

As Mr. Essi correctly notes, the City of Lakewood and its officals might face potential liablity under the federal securities laws for material mistatements or material ommisions. For example, this liability can arrive in the form of a lawsuit from a hedge fund, or public investment fund, or from the enforcement activities of the Securities and Exchange Commission.

Again, I encourage readers to visit and review the SEC statement at this link: https://www.sec.gov/litigation/investre ... -69516.htm

Why is this a potential legal risk for the City? Our public employees, public officials, and their private law firms appear to be completely uniformed with respect to the types of statements and/or omissions described in this thread. Let's take a moment and review a couple of disclosure problems that might trigger liability under the SEC Harrisburg Release.

Disclosure Problem No. 1: The January 2015 Press Conference

At a press conference in January 2015, the City announced plans to close Lakewood Hospital and build a Family Health Center. This plan was represented to the media and the public as a $120 million investment in the future of the City. This figure (or similar figures) was subsequently used in printed announcements sent to residents with water bills. This figure was never substantiated and likely cannot be given 1.) the loss of future lease payments to the City, 2.) the loss of future hospital employee-related income tax revenue, 3.) the value of the loss of charity care delivered to the community, and, 4.) the obvious loss in value of Lakewood Hospital as an actual going-concern. This $120 million figure was widely reported in the media and fully-debated here and in the Lakewood Observer.

So, here we have a well-defined instance of a material representation about a financial situation related to the City that was likely a misrepresentation to the public. It was an affirmative misrepresentation about the value or benefit of the transaction and also a misrepresentation in terms of its failure to disclose associated losses and associated costs.

That is, it was false in two different ways. 1.) There was no $120 million investment proposed in the public Letter of Intent issued by the City. 2.) The value of the proposal in the Letter of Intent was materially offset by obvious, but, undisclosed losses. The City had full knowledge of these obvious off-sets at the time the misrepresentation was made.

If the statement was true it should have been factually substantiated with supporting analysis. If the statement was false, it should never have been made. However, in either situation, unsubstantiated or false, it was a material statement related to the financial condition of a city that issues municipal bonds and, therefore, falls within the class of statements by public officials of concern to the Securities and Exchange Commission as potentially illegal.

Why would our elected and appointed officials ever take this kind of a risk?

As citizens, voters, and taxpayers, we each have a reasonable expectation that our local public officials will communicate with us with a basic level of honesty. To the extent that they fail to do so, they place our City at risk of significant legal liability.

--Mark


tom monahan
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Re: Civic Accountability -- Honesty in Local Government I

Postby tom monahan » Sun Dec 04, 2016 12:41 pm

Mark:

To one of your points about lost income taxes, I remember Tom Bullock on at least two instances at council meetings that he doubted that the city would ever make up for the losses of that income stream.


Bridget Conant
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Re: Civic Accountability -- Honesty in Local Government I

Postby Bridget Conant » Sun Dec 04, 2016 3:21 pm

To one of your points about lost income taxes, I remember Tom Bullock on at least two instances at council meetings that he doubted that the city would ever make up for the losses of that income stream.


Documented statements like these will make it impossiblr for them to deny or defend their actions. There is virtually no way they can feign ignorance.

It's really quite remarkable how utterly clueless these feckless city officials are. Wouldn't you think with some of them being lawyers that they'd be more careful?


Mark Kindt
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Re: Civic Accountability -- Honesty in Local Government I

Postby Mark Kindt » Sun Dec 04, 2016 4:19 pm

By now, all you diligent readers have read the SEC Harrisburg Release right down to the footnotes. Excellent! But you're thinking to yourself: "Mark, wasn't Harrisburg a failing city? How does that apply to Lakewood?"

Be patient and the answer to that question will become clear as you read future posts this week.

My theme is the importance of why our local government must be open, transparent, honest and accountable. As we review various issues related to the city administration, we'll see whether or not our elected and appointed public officials have increased the risk of legal liability to the City or have reduced it.

My presentation here this week will illustrate the premise that when local officials disregard openness, transparency, or honesty, the inevitable consequences are an increase in the risk of legal liability to the City. Sure, this seems obvious, but let's see how it actually plays-out locally in actual real-world civic conditions.

That's it for the weekend.

--Mark

PS . Tomorrow, we'll look at the question of whether investors in municipal bonds would have found public information about the $100 million offer from Metro Health System (to run Lakewood Hospital) useful to their bond investment decisions. Spoiler alert: The city administration kept that secret from the public, from the majority of city council, and, obviously, from the bond market. Whoops!


Mark Kindt
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Re: Civic Accountability -- Honesty in Local Government I

Postby Mark Kindt » Mon Dec 05, 2016 9:50 am

Was there a reason that the city administration felt compelled to misrepresent the value of the proposed deal to close Lakewood Hospital?

Could it have been that the secretly rejected Metro Heath System proposal was better across all dimensions for the City of Lakewood?

Today, we review aspects of the proposal from Metro Health System to run and invest in Lakewood Hospital.

To date, there is no evidence that the solicitation process to various health care entities to continue to run Lakewood Hospital was open or transparent or even fair at fundamental levels.

Disclosure Problem No. 2: The Proposal from Metro Health System

During the LHA proposal solicitation process (led by the city administration), Metro Health System responded with a substantial proposal. Metro proposed to continue inpatient operations at Lakewood Hospital for 10 years and proposed an additional $10,000,000 investment during each year, totally $100 million. Though known to the Mayor, the proposal was never made public during the closed process that led to the original Letter of Intent. The Metro proposal was rejected with the knowledge of the Mayor, but outside of any public governmental oversight or process.

Given the sheer magnitude of the proposal, given the integrity of the Metro as a provider, given the benefit of continued lease payments and continued income tax revenues from hospital employees, this proposal was obviously material.

Clearly, the omission of this material information with respect to the City’s future financial condition is within the class of disclosures or omissions that would concern the SEC under the City of Harrisburg Release.

What is more troubling is that the city administration concealed this proposal for months after the public announcement of the Letter of Intent to close the hospital was made public at the press conference at city hall.

Here we have a perfect example of a lack of openness and transparency as well as an actual impediment to any legitimate review by city council. While some council members serving on the LHA board may have had an opportunity to learn about the proposal, other council members were apparently excluded from any knowledge of the proposal.

Did this secrecy increase or decrease the risk of potential legal liability to the city?

It increased it in two distinct ways:

First, the failure to disclose material information in light of later misrepresentations (reviewed above) renders the City vulnerable to a potential suit under the securities laws by affected bond holders. Sophisticated class action lawyers bring these types of actions routinely across the country. Why should Lakewood be an exception?

More importantly, and perhaps potentially worse in financial severity of risk, the secret and very unusual solicitation process conducted by LHA (supposedly under municipal leadership) leaves the city vulnerable to a potential treble-damages action under the federal antitrust laws from any excluded healthcare provider.


Mark Kindt
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Re: Civic Accountability -- Honesty in Local Government I

Postby Mark Kindt » Mon Dec 05, 2016 10:51 am

For completeness, here is the redacted version of the Metro proposal.

The $100 Million /Ten year investment is at page 7.
Attachments
Lakewood Metro Presentation 9.17.14_Redacted.pdf
(1.43 MiB) Downloaded 65 times


Mark Kindt
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Re: Civic Accountability -- Honesty in Local Government I

Postby Mark Kindt » Mon Dec 05, 2016 12:12 pm

By now, readers should be clear on the SEC Harrisburg Release and how it might apply to local public officials.

Let me explain “treble damages” under the federal antitrust laws. Because antitrust violations can be so damaging to competition and our economy, Congress enacted statutes that allow injured parties to recover three-times their actual monetary damages, hence “treble damages”. In other words, the damages of the winner are tripled!

There are two pathways to recover triple damages under our antitrust laws. Both the Sherman Act and the Clayton Act provide for these expansive damages in antitrust cases.

In previous articles in the Lakewood Observer, the questionable proposal process used to solicit health care providers to continue to run Lakewood Hospital has been characterized as a form of bid-steering or bid-rigging.

As a former antitrust enforcement lawyer, I believe that those articles have correctly characterized an improper proposal process that likely violated the federal antitrust laws.

In a hypothetical antitrust lawsuit brought by an excluded health care provider, the monetary damages claim would probably be larger than the City of Lakewood’s entire annual revenue. Multiply that number times three and you have treble damages. Risky business, eh?

Should the City lose such a lawsuit, it would also have to pay the attorneys’ fees of the party who brought the lawsuit.

Such a lawsuit would likely severely impair the City’s bond rating with the various bond rating agencies. Defeat in court could also lead the City into bankruptcy.

Yes, this is merely hypothetical.

I make the point to clearly illustrate that the decision of the city administration to participate in a non-public proposal process carried high (and seemly under-evaluated) legal risks.

However, as a former antitrust lawyer, I believe that parties injured by the closure of Lakewood Hospital would have a viable antitrust action to bring in federal court against the City. Just because such a case has not yet been brought does not mean that there is no risk to the City.


Bridget Conant
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Re: Civic Accountability -- Honesty in Local Government I

Postby Bridget Conant » Mon Dec 05, 2016 1:50 pm

A related question.

Who would have standing to sue? Only a provider kept out of the process? Holders of or investors in city bonds? Taxpayer?


Dan Alaimo
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Re: Civic Accountability -- Honesty in Local Government I

Postby Dan Alaimo » Mon Dec 05, 2016 2:26 pm

Mark Kindt wrote:For completeness, here is the redacted version of the Metro proposal.

The $100 Million /Ten year investment is at page 7.


Some quick observations:
It was a 10-year investment commitment, not a commitment to run the hospital for 10 years. Is it safe to assume that after investing in the hospital for 10 years, they would continue to operate it for some time into the future, perhaps determined in negotiations?
All of this is was the opening bid in what would hopefully turn into further negotiations, and an even better deal.

This was taking place at a time when Metro was formulating the redevelopment plan made public recently, thus the need for the deadlines they set.
Another comment: in the run up to the 2016 election Kevin Butler cited 2015 communications as proof that Metro rebuffed the city. However, the pertinent offers, with their deadlines for acceptance, were made in 2014.


"When tyrants tremble, sick with fear,
And hear their death-knell ringing,
When friends rejoice both far and near,
How can I keep from singing?"
--from the Pete Seeger version of "How can I keep from singing?"

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