Illinois Mayor Pays Up for Bond Accusations

CHICAGO (CN) — The SEC said the mayor of beleaguered Chicago suburb Harvey, Ill., has agreed to pay $10,000 to settle claims of municipal bond fraud.

While Eric J. Kellogg has not admitted or denied the charges, he agreed to pay $10,000 and "never participate in a municipal bond offering again," according to a U.S. Securities and Exchange Commission press release. The settlement is subject to final court approval.

According to the SEC's civil complaint, Kellogg participated in a scheme that funneled investors' money away from a Holiday Inn hotel project and into the hands of city officials.

In 2008, 2009 and 2010, Harvey offered up $14 million in municipal bonds that he said would fund the construction of a Holiday Inn in Harvey, and would be "repaid from dedicated tax revenue streams" such as the city's hotel and motel tax.

However, the hotel "has turned into a fiasco for bond investors and Harvey residents...and stands as an unfinished decrepit shell," the complaint states.

Some of the bond proceeds went to paying past-due construction and real estate tax bills, while others were transferred in between bank accounts owned by the developer and former comptroller Joseph T. Letke's company, the SEC claims.

About $290,000 was allegedly given directly to Letke. A judgment was issued against Harvey and Letke in 2014 barring them from issuing any more bonds.

Another $1.7 million of the bond money was used "to fund the city's payroll and other operational costs," according to the SEC.

Earlier this year, independent auditors told Fox 32 News that the city was "insolvent," and key records were missing that should show where and why its money was spent. Harvey reportedly stopped having independent audits performed every year, violating state law, and in 2011 was found to be at least $59 million in debt.

Due to the local government's lack of transparency, Harvey's city council refused to approve any real estate taxes to be collected this year.

Kellogg, who has been mayor of Harvey since 2003 and was an alderman since the early 1990s, is no stranger to corruption allegations.

He was sued last year by a former girlfriend who said he allowed other city officials to berate and threaten her after they broke up, forcing her to quit her job as his aide. Kellogg runs Harvey through nepotism, she claims, handing out favors to relatives and friends.

The same year, an audit accused him of using federal grant money earmarked for two new police cars to buy himself a Chevy Tahoe.

The SEC says in its lawsuit that, when subpoenaed for an investigative testimonial, Kellogg pleaded his Fifth Amendment rights against self-incrimination when answering most of its questions.

"Investors were told one thing while the city did another, and Kellogg was in a position to control the bond issuances and prevent any fraudulent use of investor money. His days of participating in muni bond offerings are over," LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division's Public Finance Abuse Unit, said in a statement.

Harvey spokesman Sean Howard said in a statement that "this matter is now behind us and we can now move forward."

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