Lots of red flags for failed Arizona sports park charged with investor fraud, say bond buyers

Park University Gilbert

As fresh woes rain down on a failed Arizona sports park financed with $284 million of unrated municipal bonds, investors said the watch word is "buyer beware" when it comes to speculative project finance deals.

"The complaint about the muni market is that a lot of these high-yield deals in muniland are 'build it and they will come' transactions," said a high-yield portfolio manager who passed on the deal at the time. "That's why you want a money manager to really sit down and kick the tires on these types of transactions, because there's just so much that can go wrong."

On Tuesday, the U.S. Attorney's Office for the Southern District of New York and the Securities and Exchange Commission announced charges against individuals in connection with two municipal bond offerings totaling $284 million that financed the sports complex in Mesa, Arizona and quickly fell into default and bankruptcy.  

The SEC's civil complaint charges Randall Miller, Chad Miller, and Jeffrey De Laveaga with violating the antifraud provisions of the federal securities laws. The DOJ indictment charges Randy Miller, the former chairman and president of Legacy Sports, and his son, Chad Miller, the former CEO of Legacy Sports, with engaging in a scheme to defraud investors of more than $280 million in the Legacy Cares muni bond offerings.

Among other allegations, the DOJ said the father and son created phony letters of intent and "pre-contracts" from sports organizations that were presented to investors as evidence of demand for the park's facilities. The pair "promptly converted at least hundreds of thousands of dollars of the bond proceeds to their personal use," including cars, homes and salaries, the complaint said.

The charges are the latest fallout for the failed youth sports park, which also faces bondholder lawsuits against the underwriter and bond counsel. Legacy Cares began missing payments within its first year of operation after floating $250.8 million of unrated revenue bonds in 2020 and another $33 million in 2021 through the Arizona Industrial Development Authority. The bonds were priced at yields from 6.25% to 7.836%.

Ziegler was the underwriter. Gust Rosenfeld, PLC was bond counsel. All but $7.3 million of the debt was tax exempt.

The limited offering memorandum for the 2020 bonds included an extensive section on risk factors along with warnings that potential investors are solely responsible for evaluating the bonds' merits and risks and must be able to afford the complete loss of the investment.

"This was an ugly deal," said the high-yield manager. "There were a lot of red flags."

Among the warning signs were preliminary bond document feasibility studies that were not updated with fresh numbers after the COVID pandemic, a weak collateral package and lack of binding grants, the money manager said.

The investor recalled seeing the allegedly forged letters of intent and "one of the questions I remember asking [the banker] was, 'Does any money have to be put down with the letters?' and they said no," the buysider said. "Can you really tell if letters are forged? No, but you can tell if there's money deposited. It felt like it was very, very light on true commitments."

The bondholder litigation was spurred by the fallout from Legacy Cares' May 2023 Chapter 11 bankruptcy, which led to a federal court-sanctioned sale of the 320-acre park for $25.7 million in cash. Bondholders were allocated only $2.4 million in cash along with an 11% equity stake in the venue's purchaser. 

Burned bondholders filed two lawsuits against Ziegler, Gust Rosenfeld, Legacy Sports, and both Millers in Maricopa County Superior Court.

The plaintiffs claimed the bond offerings were based on false projections and that it was incumbent on the underwriter and bond counsel to conduct due diligence.

The lawsuits, one of which was brought by Vanguard, Voyageur, AllianceBernstein and PIMCO and the other by Saybrook Fund Advisors, have since been consolidated into one complaint, and are now in discovery. Oral arguments relating to a motion to compel discovery responses from Ziegler are currently set for May 15.

Jon Schotz, co-managing partner at Saybrook Advisors, said he wasn't surprised by the latest charges and indictments from the SEC and the DOJ.

"This was amateur hour," Schotz said of the Legacy Cares management team.

The lesson for buyers looking for deals in the speculative-grade market: keep your eyes wide open, said market participants.

"The number one thing that any buyer of municipal credit should be doing is having both eyes wide open," said Craig Mauermann, a portfolio manager and managing director for Thornburg Investment Management.

"It is critical that investors conduct rigorous diligence and actively monitor underlying credit quality," said Ed Fierro, a partner at Bracewell LLP. "If it is too good to be true, it usually is."

Fierro and others said Legacy Cares is more of a one off than indicative of the riskiness of the speculative-grade muni market.

"The allegations of lies, forged documents and false projections are not symbolic of the high yield market," Fierro said. "It is a risky market with respect to credit quality but not rampant with fraud."

Generally speaking, when the extensiveness of a fraud gets to the point where  someone is creating false data and documents "it is tough to blame gatekeepers applying traditional due diligence," said Peter Chan, a partner at law firm Baker & McKenzie who previously served as assistant regional director in the SEC's Chicago regional office. Chan added that he didn't know enough about the underlying facts to comment on the specific Legacy Cares situation.

But the case illustrates the importance of the SEC's Public Finance Abuse Unit, Chan said. "There's only so much you can do to catch fraud in terms of due diligence, and so it's important to send the message out that the Public Finance Abuse Unit is still policing the market and that is quite important from a deterrence perspective," he said. "You might think you might not get caught, but if you get caught you go to jail."

A spokesperson for Gust Rosenfeld said the firm "denies the allegations made against it and is vigorously defending the lawsuit."

"Ziegler was not aware of any fabrication of any documents at the time of the bond offerings and has been fully cooperating with governmental authorities with respect to their investigations," a spokesperson said.