Michigan township faces legal complaint from underwriter of hacked deal

White Lake Township

White Lake Township, Michigan, faces a legal threat from the lead underwriter of a bond sale that was compromised by an online hack.

Attorneys for Baird, leader of a syndicate that won the Oct. 31 auction for the township's $29 million of general obligation bonds, sent a demand letter to the township on Jan. 23, claiming damages from the cyberattack.

Baird believes it lost between $6 million and $7 million from the hack and is holding the township responsible for alleged losses, the township disclosed in a supplement to the preliminary official statement for its Series 2025 bonds. The original deal was canceled after it was compromised.

Baird spokespersons did not respond to requests for comment. White Lake Treasurer Mike Roman was unavailable for immediate comment.

Using a compromised email account, hackers impersonated a township official and gave fraudulent wiring instructions, allowing them to intercept the $29.064 million purchase price of the Series 2024B bonds, the township disclosed in its original POS for its forthcoming bond sale, in which the township plans to raise funds for the same civic center project that was the purpose of the canceled October sale.

The POS for the Series 2025 bonds included new details about the hack of the Series 2024B bonds, such as that White Lake had a cyber insurance policy that covered certain costs, but that only part of the purchase price had thus far been recovered by Baird.

The White Lake hack was a warning sign for the muni market, experts and market participants said. 

The township "believes it has material defenses to Baird's allegations [and] intends to vigorously present its defenses," it said in the POS supplement.

"If the township were to incur a liability for claimed losses arising from the cyber criminal event that exceeded available insurance coverage, the township believes that it has reserves and other tools available to address such liability, including the issuance of judgment bonds," White Lake Township said in the supplement. 

The state of Michigan lets local governments issue certificates of indebtedness or bonds to raise money to pay judgments in such cases, the township said.

Judgment bonds allow local governments to issue debt to pay for legal judgments that would be hard to pay all at once. Recent examples in Michigan include $5.5 million of judgment bonds issued by Muskegon County in 2020 and $323 million of bonds Michigan State University issued in 2019 to pay for a legal settlement with victims of serial sex abuser Larry Nassar.  

The Citizens Research Council of Michigan found that "a strong argument can be made that such laws violate the spirit, if not the letter of constitutional provisions on local government… and the power to tax," but that judgment bonds ultimately can be reconciled with the state's legal framework.

The township, in its POS supplement, also disclosed that it faces a civil complaint from White Lake Caddis, LLC, alleging breach of contract over a professional services agreement for work on the civic center. The agreement was for White Lake Caddis to provide design consulting services.

After the township terminated the contract in 2022, the township hired other consultants to design and develop the civic center. White Lake Caddis alleges this breached an exclusivity and non-circumvention provision in the contract, and that the township failed to return its work product. It also claims the township failed to reimburse it for $469,241 of services. 

The township disputes those allegations and plans to vigorously defend itself against the complaint, it said in the supplement. It believes any liability arising from the civil complaint will have no impact on its ability to pay debt service on the bonds.