City of Harvey reaches deal with SEC over bond fiasco

The City of Harvey has agreed to let a federal court oversee how it borrows and spends money after a bond market scandal cost its hard-up taxpayers millions.

Six months after the Securities and Exchange Commission accused Harvey and its former Comptroller Joseph Letke of rigging a $14 million bond issue to personally benefit Letke and to illegally paper over cracks in the city’s finances, U.S. District Judge Amy St. Eve on Wednesday approved a consent decree that effectively ends the case.

The deal lifts a temporary ban on cash-strapped Harvey borrowing money and contains no admission of wrongdoing by any Harvey officials. But it also does not protect them from potential criminal prosecution.

It requires that the city hire an independent monitor approved by the SEC to go over and approve its procedures before it can issue any more bonds. Harvey will also have to hire a consultant to track its spending of money raised in the bond market, hire an SEC-approved auditor, and cooperate with the SEC.

The SEC had alleged that the city defrauded investors about how it intended to use cash it raised in the bond market between 2008 and 2010.

The money was supposed to be used to develop a Holiday Inn hotel, which would then generate tax revenue to repay bond holders. But after taking huge sums of cash, developer Satish Gabhawala allegedly fled to India, leaving the unfinished hotel to rot.

Harvey illegally used at least $1.7 million of the remaining bond funds to keep the city running and to make payroll for city workers, the SEC alleged.

Letke, who was not in court Wednesday and has failed to meet a series of court-ordered deadlines to respond to the allegations, asserted his Fifth Amendment rights against self-incrimination 178 times when he was deposed about his role in the fiasco earlier this year.

He was handed $269,000 in “undisclosed payments” by Gabhawala at the same time he was being paid $540,000 in “consultant’s fees” for marketing the bonds by Harvey, the SEC alleges.

Letke took the Fifth when asked in April if that was a conflict of interest, and when asked if he was responsible for Harvey’s “impending financial ruin,” which he himself had spelled out to Harvey Mayor Eric Kellogg in a memo in April.

He also took the Fifth when quizzed about his friendship with Kellogg, his knowledge of an $88,000 payment the city paid to Kellogg’s son to set up a Facebook and Twitter account, and about allegedly corrupt payments made to businesses owned by a Harvey alderman and Dixmoor Mayor Donald Luster.

The deal agreed to Wednesday explicitly prohibits Harvey from giving side jobs to any of the monitors, auditors and consultants it is required to hire.

It does not end the case against Letke, whose governmental role in a number of south suburbs and the South Suburban Joint Action Water Agency remains under federal investigation. Letke is due to be permanently barred from the bond industry in January if he fails to respond to the allegations against him.

Notably, Letke was employed by the suburb of Riverdale when it, in 2012, gave convicted fraudster John Thomas $900,000 in tax incremental financing to redevelop its marina.

Thomas — a former federal mole, who wore a wire against former Gov. Rod Blagojevich’s disgraced fundraiser Tony Rezko — pleaded guilty in federal court in May to looting the Riverdale TIF money for his own use.

Thomas was also involved in raising financing for the Harvey Holiday Inn project and, sources say, wore a wire for the FBI at a meeting with Gabhawala and Letke.

One of the bonds issued to build the hotel won’t mature until 2028 — leaving taxpayers on the hook for another 14 years. But lawyers for Harvey said after the hearing Wednesday that the city “is confident that now it can continue to move forward on the path to future success.”