Agency investigates relationship between broker, Inland Energy VP
March 18, 2012 10:17 AM
Brooke Edwards Staggs
This is part one in a two-part series looking at the SEC’s investigation into the city of Victorville. See Monday’s Daily Press for part two, looking at whether bond funds were used to make campaign contributions.
VICTORVILLE • As part of its two-year probe into Victorville, the Securities and Exchange Commission is investigating whether there were hidden financial ties between the man who led the charge on the city’s largest energy venture and the man who’s brokered more than $400 million in taxpayer-supported debt on behalf of the city.
If so, a court judgment states Jeff Kinsell and his brokerage firm, Kinsell, Newcomb & De Dios, might have violated federal securities law, which could subject the firm to fines and other disciplinary action.
The SEC on Jan. 26 subpoenaed personal bank records for Inland Energy Vice President Thomas Barnett, who was paid hundreds of thousands of dollars out of city bond funds for work on local energy projects that are now shelved or defunct.
Barnett asked to “quash” the order, arguing it was too broad and that it invaded his privacy. But Judge Marc Goldman with the U.S. District Court’s Central District denied Barnett’s request Jan. 5, stating in his judgment that the bank records are “relevant” to a “legitimate law enforcement inquiry.”
“I have no comment on this matter nor will I in the future,” Barnett said via email Thursday.
Kinsell began serving as broker for Victorville’s bonds in 2003, at which time he said he hired Barnett to work for a joint powers authority his firm was launching. After Newport Beach-based Inland Energy decided to develop its own massive power plant in Victorville with help from the city, Kinsell said Barnett began working for that firm and the two started splitting the cost of Barnett’s salary.
Barnett stayed on Kinsell’s payroll so he could keep his health benefits and pension plan, Kinsell said. But by about 2006, Kinsell said Inland Energy was reimbursing Kinsell, Newcomb & De Dios for 100 percent of Barnett’s salary.
Meanwhile, city records show Victorville was paying Barnett and other Inland Energy employees using the very bond funds Kinsell had helped secure.
The city of Victorville paid Inland Energy more than $13 million between August 2005 and March 2009 under an open-ended contract, according to records obtained by the Daily Press. Some $11.2 million went toward development of the shelved Victorville 2 power plant, with roughly 40 percent of that total used to pay Inland Energy staff.
Victorville paid Barnett $346,250 in 2008 alone for working an average of 29 hours per week, primarily in his role as project manager on VV2.
According to a February 2010 email to the city’s finance department from Doug Robertson, who’s now Victorville’s city manager, those payments to Inland were made using bonds brokered by Kinsell for improvements at Southern California Logistics Airport — even though the power plant is located just outside airport property.
The potential problem is that federal securities law says brokers can’t offer cash, gifts or services such as employment in order to make a deal happen. And if there’s any financial connection with a party that benefits from a bond deal, that relationship has to be disclosed to investors.
Now court records show the SEC is looking into whether Kinsell should have disclosed his ties to Barnett, who ultimately benefited from the staggering amount of bond debt that Victorville took on.
The Daily Press has reported that in 2007, the city used proceeds from bonds sold by Kinsell to cover a $50 million downpayment on equipment for VV2. The move was a gamble, city officials later admitted, since Victorville hadn’t yet secured power purchase agreements and financing to bring that project to fruition.
Barnett touted the project at the time, telling the Daily Press that the risks were relatively small and that there was an escape clause. But by 2010, Victorville defaulted on the equipment payment and had to walk away from its $50 million deposit, with VV2 now nothing more than a set of permits and plans.
Though Barnett ultimately benefited from the bonds being issued, Kinsell said in an emailed statement that his relationship with Barnett “wasn’t appropriate to disclose in bond documents” because Kinsell’s firm wasn’t benefiting financially from the project or paying Barnett’s salary. He said he did disclose the issue to a number of city officials, including former City Manager Jon Roberts and City Attorney Andre de Bortnowsky, who served as co-disclosure counsel on the bonds.
De Bortnowsky said via email Friday that he wasn’t aware of any relationship between Kinsell and Barnett that should’ve been disclosed to investors.
De Bortnowsky monitored meetings where the City Council approved payments to Inland Energy that were recorded against the SCLA Authority bond fund account. But he said “unequivocally” that he wasn’t aware of Barnett having benefited from bond proceeds beyond any share of the underwriter’s fee Kinsell might have shared with Barnett.
Kinsell said his firm “will continue to fully cooperate with the SEC in its investigation.”