Camas Magazine: View Article


‘The Casino Was Rigged’

	6/29/2004

Scathing IRS report blames the city and Cowles companies for RPS garage bond sale duplicity.

USING SURPRISINGLY HARSH LANGUAGE to characterize the depth of wrongdoing they found, IRS investigators have produced a final report based on their examination of the River Park Square parking garage transaction. Camas obtained the report, dated June 22, 2004, earlier today.

The purpose of the investigation, conducted by the IRS Tax Exempt Bond Unit, was to determine whether $31.5 million in 1998 River Park Square parking garage bonds were issued in accordance with federal tax rules. Given earlier indications (see "Ominous Message from the IRS") there was little question that IRS would find the bonds were not in compliance. But in the 30 pages of the final "proposed determination" report, the IRS goes much further, bluntly concluding that the underlying purpose of the transaction was to "unjustly" enrich Cowles real estate companies, saying that "from the start" the transaction was intended to deliver private benefits to Cowles companies "to the detriment of the public."

The report is replete with strong language that criticizes (and in places, mocks) the motivations, performance and competence of the lawyers and public officials involved in the garage transaction. It accuses them of not only going along with a bad deal, but of working together to hide its flaws from bondholders and the public. Among its strongest findings, the IRS concurs with Camas Magazine's earliest conclusions that public officials working with Betsy Cowles and her agents deliberately manipulated appraisals of the new garage as a cover for the laundering of well over $10 million in unlawful profits to Cowles real estate companies.

"The appraisals in reality were nothing more than a notch in [the] post of public deception," the IRS found.

"The Project was dependent from the start on the garage valuation. In this case, the garage was clearly overvalued. The overvaluation was the result of the method dictated by the City and the assumptions used as provided by the [RPS] Developer (as shown throughout this report.) In addition, the City, the Developer and bond Counsel all ignored the obvious overstatements as detailed in all the reports on the project provided. All parties involved appeared to be struck by ostrich fever, a collective burying of heads in the sand. This is clearly what the developer needed."

When concerns of city staff caused the purchase price of the garage to be whittled down from near $30 million to $26 million, the result was that Cowles agents demanded, and received, compensation by adding to the already inflated "ground rent" to be paid to Cowles companies.

"The fact of this matter is the casino was rigged," the IRS observed. "Any adjustment in the purchase price resulted in an adjustment of the ground lease. If the price went down, the lease went up."

The report, whose footnotes frequently cite the deposition testimony of Betsy Cowles and her lead lawyer, Duane Swinton, is as hard on city officials as it is on Cowles and her companies.

Referring to the nonprofit Spokane Downtown Foundation, which Cowles set up to sell the RPS garage bonds, the report makes a pointed observation: "It is clear from the facts of this case, the developer had, and continues to have a particular relationship with the City of Spokane and the Issuer/Foundation such that it was in a position to control or influence its activities."

Like earlier drafts of IRS findings, the new report contains a few mistakes and assorted typographical errors. On the whole, however, it appears to add considerable weight to the detailed allegations framed by bondholder attorneys in the pending RPS federal securities fraud action, scheduled for trial early next year. In the federal fraud case, bondholders have accused the city, Cowles companies, and others of involvement in a fraudulent scheme that resulted in the withholding of "material" information from investors.

The new report also provides fresh substance to earlier indications that the IRS is actively considering additional criminal or civil action against participants in the garage transaction. In particular, the report digs deeply into the events of the summer of 1999, when a hidden revenue crisis unfolded. This was when AMC Theatres, one of the mall's anchor tenants, apparently learned for the first time that its customers would be charged to park in the RPS garage. (See "Under the Influence.") The IRS notes that AMC filed a default letter with RPS, that even city officials helped to conceal it, and that part of the resolution of the crisis was a secretive, one-time payment of $400,000 to AMC by the RPS developer. This was done, the IRS says, to avoid puncturing the faulty garage revenue projections. (Roughly half of projected income was supposed to come from AMC customers.)

"The $400,000 payment to cover lost revenues is nothing more than a kickback of Bond proceeds to make it appear there are no lost revenues as a result of AMC's default. This portion of the transaction represents affirmative acts engaged in by the Developer, Bond Counsel, the Issuer/Foundation and the City to the detriment of the public and for the direct and private benefit of the developer," the report reads. "This portion of the transaction raises troubling aspects of potential fraud."

The IRS's basic conclusions are no different than those from its previous reports. Contrary to the numerous public declarations by all parties that the garage project was for a public purpose, the IRS concluded it was just the opposite. It refers to the heart of the garage financing as "smoke and mirrors" and finds that "the intent of the transaction" was to get money to Cowles real estate companies to help finance the private mall.

"The fact that it was done through a methodology that essentially attempted to conceal this fact does not change the outcome," the report reads.

THE END

To read the entire IRS ruling, click here.