| A New RPS Fraud? | |
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By Larry Shook |
2/5/2007 |
Hidden legal advice raises the question
When the City of Spokane settled the bitter River Park Square securities fraud case, in December 2004, it never actually admitted wrongdoing. The late Mayor Jim West said he wanted to settle, because a retired federal judge told him that the city's defense was weak. (See "Busted" and "The Mayor's Confession") And, as former city attorney Mike Connelly delicately put it, the city might have been found guilty at trial of "contributory negligence."
But if the city didn't actually confess to securities fraud, it demonstrably admitted to $45 million worth of guilty conscience. That's how much city officials had the city's taxpayers pony up to settle the case.
Like everything else about River Park Square, the way the securities fraud case was settled is shady.
Former City Councilwoman Cherie Rodgers spent her entire nine years in office trying to break the project's secrecy, and she took one last crack at it when she left office.
Rodgers's last official act, on December 12, 2005, was to provide Mayor Dennis Hession and her fellow council members with an explosive e-mail. It was from Gary Ceriani, former counsel to the bondholders who sued over the River Park Square garage bonds. When the city bought the bondholders' case (for $44.8 million in principle and interest), it also retained Ceriani's Denver law firm.
The rationale behind that settlement was to make Ceriani's clients whole, then retain his formidable services to go after the other defendants in the federal case. It might have been a brilliant strategy--if the city had been sincere. Rodgers never thought it was.
She considered the evidence insurmountable that city officials had participated in criminal fraud with River Park Square developer Betsy Cowles. Rodgers had been itching to take the witness stand with a wheelbarrow full of documents to explain why.
When city attorneys recommended the city buy the bondholders' complaint, they explained that it would let the city "stand in the bondholders' shoes."
"I'm not sure those shoes fit us," Rodgers said in voting against the settlement. She didn't think the shoes fit, because the bondholders' 91-point "Omnibus Statement of Facts" essentially proved that the city had participated in a conspiracy "to divert public money for private purposes." That was exactly the charge of Seattle's O. Yale Lewis, the city's first River Park Square special counsel.
Rodgers understood full well the predicament of city lawyers. They considered it their duty to defend, not Spokane's taxpayers, but elected officials who defrauded the taxpayers in a conspiracy with the River Park Square developer.
Rodgers thought it absurd that city attorneys would now hire the very bondholder gunslinger who had earlier been stalking the city to go after the city's "partners" in the RPS "public/private partnership."
Did the city really think that such powerful partners as Cowles real estate companies, Prudential Securities, the blue blood law firms of Preston Gates & Ellis, Perkins Coie and Foster Pepper, and Walker Parking Consultants would all just throw up their hands and pay what the city asked?
Rodgers always figured that none of the RPS defendants wanted a trial because none of them wanted the deal's dirty laundry hung in public. She considered the settlement a $45 million dodge that hung the public, not the deal's dirty laundry, out to dry.
Rodgers knew that Ceriani's case against the River Park Square developer alone was worth $26 million. That's how much Cowles real estate companies made on the bonds' sale. And yet, under terms of the settlement, when all the concessions to the developer were figured in, by Rodger's calculation the developer paid less that $400,000 to settle. She says the city council was told repeatedly by the city's lawyers that Ceriani recommended this settlement.
Rodgers contacted Ceriani and asked how he could have made such a recommendation. The answer was simple, said Ceriani: he didn't. He was outraged by the suggestion that he had. It sullied his firm's reputation as a representative of securities fraud victims.
Ceriani forwarded to Rodgers an e-mail he had sent the city that supported his contention. In the e-mail, Ceriani recommended that the city try its case. After all, Spokane's taxpayers had paid a lot of money for it.
Yale Lewis had briefly represented Rodgers when the Cowleses sued Rodgers for criticizing River Park Square. Rodgers showed Lewis Ceriani's e-mail and cover letter.
"Oh, my God," said Lewis. "Do you realize what this says? It says, 'Here's a loaded gun. Be careful how you use it.'"
The loaded gun, obviously, was the e-mail's evidence that Spokane's elected officials had perpetrated an entirely new fraud against the city's taxpayers. They bought for $45 million a case worth $26 million against the River Park Square developer, and then they let the developer off for a song. And they breathed nary a word to anyone about the pungent advice with which Ceriani concluded his e-mail: "go try the damn thing."
Rodgers was struck by the blunt tone of Ceriani's missive. And she was flabbergasted that city attorneys had withheld his advice from the council. Today, she is even more distressed that more than a year has lapsed since she made the mayor and city council aware of Ceriani's e-mail and nothing has been done about it. (Click here to read Ceriani's e-mail and cover letter.)
RPS AS MONUMENT
Soon after taking office, Cherie Rodgers learned city officials went along with Betsy Cowles in keeping improper secrets about River Park Square. From that day to this, Mrs. Rodgers has considered Mrs. Cowles's mall a monument to both public corruption and the corruption of Cowles media. That corruption and the public harm it causes, she believes, has been compounded by the way the securities fraud case was settled.
"I hate to say it," says Rodgers, "but I do believe that Mayor Hession, Mary Verner, Bob Apple, Al French, Joe Shogan, and Brad Stark have all committed a new fraud on the public by not investigating the cover-up of the Ceriani e-mail. Ceriani was going to ask a jury to make Betsy Cowles pay back the $26 million the city paid her for the garage. 'Great strategy,' they said. So they paid Ceriani $45 million for his case. [Rodgers and Bob Apple were the only dissenting votes against the settlement.] Then they let Betsy walk for less than $400,000. The way I do the arithmetic, that's a whole new fraud of $25,600,000. This mayor and this city council let Betsy get away with a heist that has cost this city's citizens at least $70 million.
"Over fifty-two percent of Spokane's general fund budget goes to public safety--police and fire," Rodgers continues. "The police spend most of their time trying to solve property crime, busting meth operations, blue-collar crime. But white-collar crime goes untouched in this community, and River Park Square is a blatant example. What this mayor and city council have done makes me angry and sad. Mayor Hession and the rest should have brought [city attorneys] Connelly and [Laurel] Siddoway to the podium and demanded an explanation. But they didn't. They looked the other way. I hope the irony wasn't lost on Ceriani. We bought his case for $45 million, then we paid Betsy, she didn't pay us, and we gave her the garage free and clear."
CONTROVERSY RENEWED
While many in Spokane hoped that the River Park Square controversy would go away with settlement of the securities fraud case, it has been given new life by an unlikely player: Spokesman-Review editor Steve Smith.
By commissioning an audit of the way the newspaper covered the use of public money to redevelop its publisher's downtown mall (see "The Stench That Won't Go Away" at www.girlfromhotsprings.com and "Invitation To An Audit") Smith has reopened the controversy in the most potentially explosive way. This is because a vigorous audit could implicate the Review's publishers for using their paper as an instrument of fraud.
Clearly, no one is more sensitive to this possibility than Cowles personnel. If Steve Smith really wants to know the truth about what his owners did, it will put him in one of the most awkward, and ironic, positions of any newspaper editor in America.
"You can't feel good about doing this crusading reporting when you feel that it's your employer who you're crusading against," former Spokesman-Review reporter Oliver Staley once told a Camas Magazine reporter. (See "All in the Family.")
More recently, in "The Stench That Won't go Away," the Review's senior reporter, Bill Morlin, put it like this: "It's my belief that the newspaper's coverage of the development phases and the public/private financial arrangement surrounding River Park Square left a credibility stench that is still lingering in the newsroom and the community."
Does Steve Smith really want to discover where that stench is coming from? Is he actually betting his job on his employer's willingness to have him commission a judgment on their controversial, conceivably criminal, activity?
And the "stench"--can anything really be done about it without the Cowles family putting back the public money it took? Or without indictments being issued?
Is Washington News Council president John Hamer really being given a free hand to audit the involvement of his colleagues in the controversial River Park Square development?
But to acknowledge this basis for skepticism is not to predict that the study Smith has commissioned will be in any way dishonest or incomplete. It would be unfair to do so. The report deserves the right to speak for itself. Beyond that, there is reason to hope that it will be a fine piece of work.
This is because of the report's author, Bill Richards. Mr. Richards is a highly respected journalist, a veteran of The Washington Post and Wall Street Journal.
RIVETING DRAMA
Still, the drama surrounding Smith's audit is riveting. Spokane's hundred years of solitude under the influence of Cowles media could be brought to a noisy end by its findings. For a hundred years, the Cowles family has been the gatekeeper of what Spokane's citizens get to know about how the family uses its media to cover its extensive Inland Northwest business affairs. Never was that more true than during the Cowleses's publicly subsidized redevelopment of their posh new mall.
Now, Smith has brought in outsiders to set up a gate in front of the gatekeepers' estate.
At least one party appears to be uncomfortable with this arrangement. The news council's Hamer told me that Chris Peck, Smith's predecessor, sent him an e-mail objecting to the news council's study. Richards told me that Hamer had informed him of Peck's worries. Peck was, in effect, the Cowles gatekeeper as his employers, behind a phalanx of dubious confidentiality agreements, accessed tens of millions of public dollars to redevelop their valuable downtown real estate.
On September 19, 2006, I e-mailed Peck, who is now editor of the Memphis Commercial Appeal, requesting a copy of his earlier e-mail to Hamer. If he no longer had a copy, would he allow Hamer or Richards to share their copy with me? I asked.
"Larry, Got your note," Peck wrote right back. "My correspondence to John was private, and labeled so."
MOUNTAINOUS FACTS
Given the mountain of facts now known about River Park Square, it seems likely that, one way or another, The Spokesman-Review and the Washington News Council are about to make history.
To assist Richards in his work, Tim Connor, former senior editor of Camas Magazine, recently sent Richards more than 250 River Park Square-related documents. (See "Invitation to an Audit" for information about obtaining Connor's document package.)
The story that emerges from these records is nothing more than a Readers' Digest version of the saga of the Cowles mall. But even in this abbreviated form, neither the River Park Square developer nor The Spokesman-Review during editor Chris Peck's watch thought the public was entitled to know about it. (Maybe that's why Peck apparently feels unsettled by Smith's audit.)
Until Camas started digging into the story, and until the discovery phase of the federal securities fraud case, most of these records existed like mushrooms in the deep shade of Cowles media.
To take one example of the material Connor sent to Richards, consider the March 20, 1998 "Confidential" letter Cowles attorney Duane Swinton sent to assistant city attorney Stan Schwartz. Swinton served the Cowleses as both the real estate attorney for the family's River Park Square mall and First Amendment attorney for the family's Spokesman-Review newspaper. Schwartz, the city's lead attorney for River Park Square, joined the Cowles law firm for which Swinton works just as the River Park Square deal blew up into a financial scandal.
This particular letter, Connor wrote Richards, "reveals several things that are important to understanding Mr. Swinton's role and how it compromised the newspaper's journalism responsibilities. To understand the stakes involved it helps to start with the S-R's account, on April 3, 2004, of how Chris Peck understood the Nordstrom lease and how he defended not publishing the 11/20/97 Sloane/Schwartz memo [summarizing some of the lease terms and risks] about it after the memo was leaked to the newspaper. In the article, Mr. Peck is quoted as saying he found Mr. Swinton's 'argument persuasive' that the Nordstrom lease was a private document, and 'we weren't in the business of wrecking someone's business plan.' What Mr. Peck either didn't understand or wasn't told by Mr. Swinton, is how profoundly the Nordstrom lease ensnared the city in a truly impossible situation that put literally tens of millions of public dollars at risk and, as importantly, exposed the city to securities fraud..."
Connor's summary offers invaluable insight to anyone trying to understand how the Cowleses used their newspaper to cover the use of public money in their mall.
Moreover, this one record, like so many other once-suppressed River Park Square records, is a strand of the deal's DNA. Swinton's "persuasive argument" wasn't persuasive at all, Camas argued in its successful $299,000 public records lawsuit against the city. The secrets Swinton wanted the city to keep were protected under confidentiality agreements that Camas argued were plainly illegal under state law. And his employer's "business plan" that Peck didn't want to "wreck"? It, too, was illegal under federal securities and tax laws. The city effectively admitted that when it settled the RPS securities fraud case in a way that, as Rodgers sees it, directly compromises quality of life and public safety in Spokane by cutting into vital services.
This is just one place--how city officials worked with the Cowleses to give them access to $23 million of federal HUD money--where evidence suggests that illegal activity could be at the very heart of the RPS deal. Here's why.
DUBIOUS LEGAL ADVICE
On November 20, 1997, city attorney Jim Sloane and assistant city attorney Stan Schwartz wrote a memo to the mayor and city council laying out risks of the HUD loan. But the city attorneys warned their employers--the council and mayor--that they couldn't share the memo with their constituents because it contained information that the developer considered proprietary. The memo, warned city attorneys Sloane and Schwartz, was confidential, protected under attorney/client privilege.
There were so many things wrong with that legal advice it's hard to know where to start. Take just two of the more obvious ones.
First, the "privilege" in attorney/client privilege is owned by the client, not the attorney. Lawyers learn that in the first year of law school.
So Sloane and Schwartz had no basis for telling their clients that they had to keep the memo secret. That they did raises the question of whether they were guilty of legal malpractice, if not something much worse. Obviously, the argument could have been made--perhaps should have been made by Sloane and Schwartz themselves--that the council and mayor had not just the right to share this frank memo with their constituents but the legal duty to do so.
After all, it was public money at risk.
And the council and mayor had been elected by the public, not the Cowles family.
And Sloane and Schwartz worked for the public. It wasn't Cowles Publishing Co., or Cowles real estate companies, signing their checks.
Second, as Camas argued in its public records case, the secrets embedded in the 11/20/97 Sloane/Schwartz memo--and in the confidentiality agreements that elected city officials signed with the developer, and that city attorneys told them they had to honor--were themselves illegal under the Washington State Public Records Act.
How could city officials and city attorneys agree to keep secrets with the developer about how they were handing over public money to the developer--especially in a state where the constitution prohibits giving public money to private parties for private purpose? And how did The Spokesman-Review cover these questions?
These would be good questions for Richards to ask.
Here is no mere can of worms, but a veritable 55-gallon drum of them. Richards and the news council have to muck through it if their report is to be credible.
PLUGGING A LEAK
This is because someone leaked the Sloane/Schwartz memo to the press. The leaker, who self-identified to me long ago, first gave the memo to Spokesman-Review reporter Kristina Johnson. Under the terms of the leak, Johnson was to be the only one at The Spokesman-Review who would ever know the leaker's identity.
What happened next goes to the heart of darkness of this sordid tale. Spokesman-Review editor Chris Peck squelched the volatile Sloane/Schwartz memo. He overruled the objections of some of his reporters and editors and wouldn't let the memo be printed in his paper. But he didn't make that decision by himself, he told me for "All in the Family." The hard-worked Duane Swinton, The Spokesman-Review's First Amendment attorney, the Cowles family's River Park Square attorney, advised Peck not to publish the memo. And then Peck got a second legal opinion, he told me. It came from Les Weatherhead, Swinton's partner in the Witherspoon Kelly law firm. Weatherhead, also an attorney for River Park Square, figured prominently in defending the developer against the securities fraud charges.
In other words, the same Chris Peck, who twice savaged Mayor John Talbott in print for being a "civic terrorist" for criticizing the HUD loan, knew that concerns of the city's own attorneys supported the mayor's position. And yet he kept silent about his brutal political character assassination. And his First Amendment attorney, who advised him against publishing the memo, has kept silent about it, too. (Swinton still serves the newspaper as its First Amendment attorney, because Smith can't find a better alternative. See "The Stench That Won't Go Away.")
And since the details of this incident appeared in "All In The Family" in the spring of 2001, Spokesman-Review publisher Stacey Cowles has kept silent about it. And his sister, River Park Square developer Betsy Cowles, has kept silent about it.
After the Sloane/Schwartz memo appeared in the offices of The Spokesman-Review, the paper's reporters hid it offsite. They stashed it in the offices of Spokane attorney Bill Powell, who represented the paper's in-house editorial union. This action, of course, would have forever remained one of the deal's countless secrets under the hallowed principle of attorney/client privilege, except for one thing: a disgusted Spokesman-Review reporter told me about it on condition of anonymity.
It would be bad enough if the story ended there. But it doesn't.
Next, the leaker gave the memo to The Wall Street Journal. The stench of River Park Square's paper trail now ripened inside city hall. City manager Bill Pupo asked the mayor and city council to sign sworn statements that they had not leaked documents to The Wall Street Journal. Only Mayor Talbott and Councilwoman Rodgers refused.
On December 21, 1998, city attorney Sloane wrote a memo to the mayor and city council alerting them to a "significant risk of liability for the City of Spokane." The risk came from the leak to The Wall Street Journal of Swinton's March 20, 1998 letter to city attorney Schwartz.
In that letter, Swinton laid out various terms of the Nordstrom lease that the developer wanted kept out of the public eye.
SWINTON'S FORESIGHT
"The contents of this letter, since it contains confidential leasing terms, is subject to the terms of the Confidentiality Agreement previously executed by the City, and its contents shall not be disclosed to any third party."
Here's what's awkward about Swinton's demand: such third parties included prospective purchasers of the River Park Square garage bonds and the IRS.
"As I have indicated, release of the specific terms of the Nordstrom lease... would be absolutely devastating to this project," Mr. Swinton concluded his letter.
He was right about that. Four of the nation's most powerful financial institutions later pointed out that they would never have purchased the RPS garage bonds if the public subsidy of Nordstrom, hidden by the city and developer, had been disclosed to them. Under federal securities law it had to be disclosed to them. That was one of the 91 listed reasons they gave for suing the city, developer and others for securities fraud.
Swinton was also right, because, as the IRS eventually ruled, the hidden terms of the Nordstrom lease was one reason the RPS garage bonds didn't qualify for the tax-exemption with which they were sold.
(Click here to see the Nov. 20, 1997 Sloane/Schwartz memo, and March 20, 1998 Swinton letter, and the Dec. 21 1998 Sloane memo.)
Nordstrom's leasing conditions gave it too much control of River Park Square for it to qualify as a tax-exempt public project. But assistant city attorney (now Cowles law firm attorney) Schwartz already knew that. In a March 26, 1998, memo to W.C. Bell in the city's planning department, Schwartz said so.
"Thus, it is my conclusion that the redevelopment of River Park Square is not a public project as that term relates to a definable legal interest in the structure...," he wrote.
(Click here to see the memo.)
And yet, in his 12/21/98 memo, Jim Sloane, Stan Schwartz's boss, was warning his clients that the leak to The Wall Street Journal was illegal, "because it is a clear breach of the confidentiality agreement between the City of Spokane and the developer of Riverpark Square. lf this disclosure results in a serious disruption in the development of the project, the developer has indicated they will pursue a claim against the City of Spokane and any individuals who may have been responsible for the disclosure of this confidential and proprietary information."
If that happened, Sloane noted ominously, the city wouldn't defend them. Both Talbott and Rodgers felt that Sloane was telling them that if they didn't go along with secrets they feared were illegal, if they didn't go along with what Sloane's and Schwartz's own written legal opinions suggested could be a multi-million dollar public fraud, the city wouldn't defend them. That meant the city's elected leaders would have to face the wrath of what was arguably the criminal enterprise of Cowles media, Cowles money and Cowles lawyers on their own. By then, everyone knew how Mayor Talbott, the "civic terrorist," had fared with the first of those threats. Just how real were the others would become clear when the Cowleses sued elected officials for criticizing their use of public funds to redevelop their mall.
THE NEWSPAPER'S WITCH-HUNT
But the volcano of the Cowles mall was still just rumbling. On January 8,1999, it erupted. The Wall Street Journal made the River Park Square controversy its lead story that day. And it prominently quoted from the bootleg Sloane/Schwartz memo.
The Spokesman-Review responded by launching a witch-hunt. "Culprit Sought In Leak of Lease," began the headline of its February 13, 1999 story responding to the Journal's story. "River Park Square Attorney Wants Judge to OK Questioning of City Officials Under Oath."
The story that followed was the reddest of herrings. It quoted Swinton saying the developer was going to court to explore bringing contempt charges against whoever leaked the documents in question. The developer wanted to "protect the legal process," he said.
The story noted that the Nordstrom lease had been ruled confidential by Superior Court Judge Linda Tompkins "as long as the loan guarantee was pending."
Whoops.
That little clause about the pending loan guarantee was a problem. Because there was a secret behind the Cowles request to use $22.65 million of the city's HUD money to redevelop their mall. The Cowleses did not want to pledge the private collateral for that loan recommended by federal guidelines. And the family didn't want the public to know that it wasn't putting up collateral.
There was also a problem with the story's suggestion that the "court-protected" Nordstrom lease had been leaked to the Journal.
As with so many, if not most, Spokesman-Review stories about the Cowles mall, the facts in this one were a few degrees out of alignment. Not many, just enough to conceal critical misrepresentations that raise questions about whether the Cowles redevelopment turned on fraud.
First, the Nordstrom lease itself hadn't been leaked to the Journal, only the city's memo. I know that, because the leaker told me. Besides, if the Journal had obtained the actual lease, why would it have contented itself to merely quote from memoranda about it instead of the document itself? Under the laws protecting the public's right to know, the Journal was entitled to publish the lease or the memo so long as it hadn't obtained them illegally.
First Amendment expert Swinton knew that as well as anyone. He also had to know it would have been basically impossible for the Journal to get its hands on the lease. This was because Swinton kept it under lock and key in his office. Even city bond counsel Roy Koegen, Koegen told me, had done as ordered and turned over his copy of the lease to Swinton.
No, what had been leaked to The Wall Street Journal were memoranda containing details about the Nordstrom lease. That's a very different thing. Again, Swinton had to know as well as anyone that the "legal process" was not on his side in keeping the memos secret. He simply had no legal standing to do so.
NASTY PROBLEM
But there's an even nastier problem here, and that's what the developer told Judge Tompkins in asking her to cloak the Nordstrom lease until after the HUD loan guarantee had been completed. Did the developer tell the judge that the Cowles family was refusing to provide the collateral for the HUD loan recommended by federal guidelines? And that the developer wanted the public to provide this collateral, and that city officials were secretly going along?
And did the develoepr tell her that the Cowles family wanted the court, too, to keep these secrets--these secrets that raised questions about whether a $23 million federal loan was being fraudulently obtained with the full complicity of city officials? (See "Inside Job.")
If so, it raises questions about Judge Tompkins judicial conduct. If not, it raises questions about whether the developer perpetrated a fraud on the court by withholding this critical information.
Either way, this is an important incident for The Spokesman-Review audit to explore.
Tellingly, "Culprit Sought" made no mention of the Sloane/Schwartz memo. So the readers of The Spokesman-Review did not get to know that the public's own lawyers were worried about the dangers of the HUD loan to the family that owned The Spokesman-Review, much as their "civic terrorist" mayor was.
That the "Culprit Sought" story and Sloane's stern warnings to the council about keeping the developer's secrets were never more than bluffs is suggested by how the flap was resolved. Councilwoman Rodgers hired her own lawyer, Frank Conklin, to defend her. Conklin wrote a courtly letter to Sloane. The whole matter disappeared, as if by magic. Conklin's legal bill to Mrs. Rodgers was $800--probably not enough to cover what the River Park Square litigants spent on Kleenex--and he wrote that off.
BUSINESS AS USUAL
The dots of this story that The Spokesman-Review has yet to connect, even under Smith's leadership, show that the way the city settled the securities fraud case appears to be effectively an admission to the conspiracy charges made by Yale Lewis. Given the city's admissions, the "stench" hovering over The Spokesman-Review's conduct, and the devastating RPS evidence that has surfaced, the question now would seem to be whether the conspiracy rises to the level of criminal conduct.
And that's why the ghosts of River Park Square continue to howl, even though Cowles media keeps ignoring their cries. Richards's report could--should--give the ghosts a microphone. What might result from that is anyone's guess.
The evidence is simply overwhelming that there is probable cause to investigate whether the public/private architects of River Park Square knowingly kept illegal secrets that allowed the developer to misappropriate tens of millions of public dollars. And, because of the way the case was settled in 2004, the statute of limitations governing such an investigation was arguably restarted at that time.
Asked what she expects to come of Steve Smith's audit, Rodgers said: "The jury's still out for me. I haven't given up on Smith yet. Spokane didn't get this way overnight."
Still, she notes the irony that The Spokesman-Review never reported on the messy Ceriani e-mail.
"Mike Prager [the paper's city hall reporter] was sitting right there in the front row when I handed the memo out," says Rodgers. "He never asked for a copy of it, never asked me about it, the paper has never reported on it. That seems like business as usual to me."
THE END
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