Mark Flatten

Consultant in Phoenix Coyotes arena deal named in fraud lawsuit

Posted on February 28, 2011 | Type: Investigative Report | Author: Mark Flatten
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A financial consultant used by Glendale, Ariz., to justify the city’s $197 million plan to keep the Phoenix Coyotes is accused of helping to defraud investors in a separate deal by producing overly optimistic revenue projections for a hockey arena in Prescott Valley, Ariz., according to a federal lawsuit.

Thomas Hocking and his company, TL Hocking & Associates, produced inflated revenue projections to secure financing for the 5,000-seat arena in Prescott Valley, according to the lawsuit filed in 2009 by investors who bought the $35 million in government bonds that paid for the project. The suit was filed after the arena failed to produce enough revenue to repay the debt, leading the bonds to be downgraded to junk status.

Hocking would not answer questions about the lawsuit or his work for Glendale when contacted by the Goldwater Institute.

Hocking is a financial consultant whose revenue projections were cited by Glendale officials to show that parking fees at the city-owned arena would cover debt payments for $100 million in bonds. The new city debt would be used to help finance the purchase of the Coyotes hockey team by a private investor. Hocking estimated parking revenues collected by the city would produce enough money to repay the bonds, which are part of a $197 million incentive package the city is offering to keep the Coyotes from moving away from the Phoenix area. A separate analysis by a different firm predicts parking fees will fall far short of what is needed to finance the debt. Some Glendale City Council members said they were not told of the negative report before the deal was approved on a 5-2 vote in December 2010.

“The council saw nothing,” said Councilwoman Joyce Clark, who voted against the Coyotes deal. “We were verbally told about a parking study that staff said was preliminary and not complete. I suspect they were referring to the Hocking study because they said based upon the preliminary draft the parking revenues would meet the obligations. I’m upset. You can’t make sound decisions unless you have all of the information before you.”

The Glendale arena opened in 2003 at a cost of $180 million. Glendale’s plan to keep the Coyotes playing there for another 30 years includes selling bonds to raise $100 million that would be paid to Chicago investor Matthew Hulsizer to help him purchase the team from the National Hockey League, which acquired the franchise after the prior owners went bankrupt. The bonds would be repaid through parking fees charged by the city for hockey games and other events at the arena. Glendale also would also pay Hulsizer an additional $97 million over the next 5½ years to manage events at the arena.

The deal relies in part on enough parking revenues coming in each year to repay the $100 million in bonds, making Hocking’s estimates critical.

Glendale Mayor Elaine Scruggs said the Hocking study is one of many reports that have been provided to council members as they weigh whether to proceed with the incentive package to Hulsizer. Scruggs, who voted in favor of the deal, said the most important figure for her is that the Coyotes add an estimated half-billion dollars in economic activity to the city, and losing the team would be devastating to the businesses around the arena.

“I’m looking at what the loss to the city is if the team goes,” Scruggs said, adding the city has to pay about $12 million in annual debt on the arena regardless of whether the team stays. “Parking is one way to earn more revenue to be able to keep the team functioning here in Glendale. The team’s value stretches way beyond what happens on the ice. That was the catalyst for the creation of our sports and entertainment district.”

The Goldwater Institute has been monitoring efforts by the city to keep the Coyotes from leaving the arena since the team’s former owners filed for bankruptcy in May 2009. The Goldwater Institute is attempting to determine if the deal violates a provision of the state constitution prohibiting governments from making gifts to private businesses, and has made it clear the Institute may sue the city if an illegal bargain is made.

Pitching an arena

Hocking is accused of skewing income projections in 2005 for the Prescott Valley arena so the partnership he was working for could obtain the government financing it needed, according to the lawsuit filed by Allstate Life Insurance Company and several individual investors who bought the Industrial Development Authority bonds used to finance the arena’s construction.

Investors were not told that two previous studies showed the area did not have enough people to support an arena as large as the one that was proposed, according to the lawsuit. Hocking and other defendants “fraudulently inflated the projected number of events and attendance at the events in order to project revenues that could support an investment grade rating for the bonds,” the lawsuit states.

The Prescott Valley deal had its origins in 2001, when representatives of Tempe-based Global Entertainment Corp. approached Prescott city officials to pitch construction of a city-financed arena that would seat between 3,500 and 5,000 people to be built at a cost of about $22 million. Global is a company that develops and manages arenas in small to mid-sized markets, primarily for minor league hockey teams operated by a subsidiary.

A feasibility study was conducted in 2001, taking into account the population of Prescott and the surrounding area, including Prescott Valley, and estimating the amount of revenue that would likely be generated to finance the deal. That study projected the arena would attract no more than 78 events per year and would not generate enough money to justify debt required to build it. Prescott officials rejected the proposal, based on the findings in that report.

In 2004, Global and the company’s financial advisor – Hocking – approached officials in nearby Prescott Valley with a similar proposal, asking the town to finance a $19 million arena through municipal bonds, according to the lawsuit.

To get an investment-grade bond rating, it was critical that financial projections showed the arena would generate at least twice the amount of money that was needed to make annual debt payments, according to the lawsuit.

A new feasibility study for an arena in Prescott Valley was completed for Global in 2005. By then the estimated cost of the facility had risen to about $25 million. The study done by Economics Research Associates, Inc., (ERA) showed the arena would not produce enough revenue to secure an investment-grade rating without additional backing from the town. Prescott Valley officials agreed to create a special taxing district, and pledged sales tax revenues from that district and a nearby commercial area to help secure the bonds. ERA also advised it should conduct a more thorough study for inclusion in documents provided to potential investors before any bonds were marketed.

The ERA preliminary report predicted the arena would attract 103 events per year, and would not produce enough revenue needed to secure a high bond rating, even with the additional tax revenues from the town, according to the lawsuit.

Ballooning Costs

After the ERA study was issued, Hocking, Global, and others involved in the arena deal realized the cost to build the facility would reach about $35 million, according to the lawsuit. Neither the 2001 study nor the one done by ERA would justify that much debt, even with the pledge of sales tax revenues from Prescott Valley.

It was at that point that Global, Hocking and a third defendant, the Fain Signature Group which owned the land and was a member of the arena partnership, “recognized the need to inflate the projections in the 2005 Preliminary Feasibility Report,” the lawsuit states.

The three defendants knew ERA would not agree to skew its projections, so they fired the firm, the lawsuit alleges.

Prescott Valley’s independent financial advisor “strongly disagreed with this course of action,” and recommended town officials insist ERA conduct the final phase of its analysis. Hocking, Global, and Fain refused, claiming that since the town was not financing the project, it could not impose the condition, according to the suit. The town eventually backed down, and no final analysis by ERA was required, prompting the town’s financial advisor to quit in protest.

Hocking’s firm produced its own feasibility study, showing the arena would attract about 133 events per year and, when combined with the sales taxes pledged by the town, would produce more than twice the revenue needed to repay the debt, enough to justify an investment-grade bond rating, according to the suit.

The $35 million project was financed through bonds issued by the Industrial Development Authority of Yavapai County, a government entity, and carried an A-minus rating. Hocking’s financial projections were included in the project’s “Official Statement,” information sent to potential investors to market the bonds, which was published in November 2005.

The official statement did not disclose the results of the two prior studies, that ERA had not completed its final analysis, or that the town’s independent financial advisor quit in protest, according to the lawsuit.

Junk bonds

Money raised through the bonds was loaned to a partnership between Global and Fain, according to the lawsuit. Hocking was their financial advisor.

The Prescott Valley arena opened in late 2006, and failed to break even from the start, much less generate the $1.6 million in net revenue it would need to repay the bonds, according the lawsuit.

The arena attracted only about 70 events per year, less than had been predicted in the 2001 study, and failed to “obtain paying attendance remotely close to the inflated projections in the official statements,” the lawsuit states.

The October 2007 payment on the bonds was missed. Bondholders were notified of the missed payment in April 2008. The following month the bonds were downgraded to junk status, and have since traded at pennies on the dollar, according to the lawsuit.

In November 2010, U.S. District Court Judge Murray Snow refused to dismiss multiple fraud claims against Hocking, Global, Fain, and other defendants. The case remains open.

Other Cities, Other Proposals

Global has pitched other hockey arenas to Arizona cities since the Prescott Valley facility opened. In 2008, the company convinced the Yuma City Council to proceed with a 6,000-seat arena. Later that year, Global was trying to get the Show Low City Council to also build a hockey facility similar to the one in Prescott Valley. Hocking had a role in both of those proposals.

Yuma City Council minutes list him as “the city’s financial advisor” who described the proposed financing of the arena to council members. Though the Yuma council approved the $60 million arena deal, voters later overturned the decision through a referendum in November 2008.

Hocking is named as Global’s financial consultant on the Show Low deal, and told the council that financial projections showed the revenues generated by the arena would be sufficient to repay the bonds used to finance the facility.

The Show Low council ultimately turned down the proposal, in part because city officials did not have confidence the financial projections provided by Global would pan out, said deputy city manager Joel Weeks.

“They wanted too many guarantees from us,” Weeks said. “Our council wasn’t comfortable providing the guarantees that they (Global) wanted if their numbers didn’t pan out. We just couldn’t take that risk.”

Hocking would not comment when contacted by the Goldwater Institute, which sent him a list of questions related to his analysis of the Coyotes deal, the allegations raised in the Prescott Valley lawsuit, and his relationship with Global. He did say in an e-mail response that “the Goldwater Institute has made false and damaging statements about me and TL Hocking & Associates to which I take great offense,” an apparent reference to a statement on Feb. 10, 2011, from the Goldwater Institute which mentions the Prescott Valley arena lawsuit.

“The Goldwater Institute does not appear to be interested in or truly wants to understand the Glendale or Prescott Valley projects, but rather seems to be more interested in further damaging my reputation,” Hocking wrote in response to repeated requests for an interview made both by phone and e-mail.

In court motions, Hocking argued he did not write the “Official Statement” sent to investors, had no fiduciary duty to bond purchasers, and is improperly lumped in with other defendants.

Global and other defendants sought unsuccessfully to be dismissed from the lawsuit, claiming among other things that the information in the Official Statement was “forward looking,” meaning it discussed what could happen and did not constitute fraudulent misrepresentations. In the company’s annual report to shareholders, Global describes the lawsuit as “without merit.” Company officials did not return phone calls from the Goldwater Institute seeking comment.

One of the unresolved questions in Glendale is what happens if parking revenues are not enough to repay the bonds, and to what degree other city funds will be at risk, said Clark, the councilwoman who voted against the incentive package.

“It’s sticking in the back of my head as cause for concern,” Clark said of the parking projections. “Any consultant that the city hires, the consultant knows that the city desires a certain outcome and works to try to achieve that if possible. We have used Mr. Hocking for years and I can’t assume anything.”

Mark Flatten is an investigative reporter for the Goldwater Institute.

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