Drastically reducing the potential returns on bonds could amount to state-sponsored securities fraud, according to a lawyer for the redevelopment agencies.

In a report published in Bloomberg, redevelopment agencies worry that the cities and counties that have redevelopment agencies could face legal backlash from the holders of the bonds, if the system is gutted under Governor Brown’s plan. That’s because the market value of the bonds could plummet, causing significant losses to the investors.

Under this scenario, the lawyer says that these investors could then sue to reclaim their losses by claiming securities fraud.

It’s a scenario that the State Treasurer’s office dismisses out right as a “hail Mary” attempt to distract people from the state’s budget woes.

From Bloomberg News:

California’s cities and counties may face bondholder lawsuits if state lawmakers abolish redevelopment authorities to get at their money, a lawyer for some of the agencies said.

About $5 billion in taxes now going to the agencies would be blended together in a caretaker fund, run by local governments, that would pay investors holding more than $20 billion of bonds. The move may damage the credit quality of the securities, causing their value to fall, said William Marticorena.

“Even a small decline in secondary-market value could produce significant investor losses and possible damages for state and local government,” Marticorena, head of public finance at the Orange County law firm of Rutan & Tucker, said in an analysis distributed March 18. “The market-value declines may not be small and the damages could be immense.”

Read the full article here.