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1/6/2004 |
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Spokane's dark side is portrayed in a pretrial brief
'TWAS TWO DAYS BEFORE CHRISTMAS, and plaintiffs in the River Park Square securities fraud case had a hefty package to deliver.
They filed a 91-point list of "material facts" that offers a riveting preview of the story jurors will hear this spring when the case goes to trial.
Beyond outlining the formidable evidence plaintiffs' attorneys have assembled to confront the named defendants, the 122-page brief offers a bleak portrait of Spokane as an ethically bankrupt community where public officials and civic leaders did the bidding of a devious and strong-armed developer.
Compiled from over 100 depositions and hundreds of thousands of pages of discovery documents, the new court filing connects the dots on the "fraudulent scheme" the RPS parking garage bondholders first alleged in April 2001. Labeled a "Joint Omnibus Statement," the document takes dead aim at the role and decisions of the "Working Group." These were lawyers, city officials, and agents of developer Betsy Cowles who not only negotiated the deal but decided what facts and risks would be disclosed to prospective investors.
Because of the prominence of many of the "Working Group" members or affiliates, the breadth and weight of the evidence assembled by plaintiffs' attorneys has implications beyond the securities fraud case. It amounts to a withering indictment of the moral and ethical standards of the coterie of insiders who went along with Betsy Cowles.
The plaintiffs' investigation of the River Park Square transaction followed the trail of breadcrumbs left by Seattle attorney O. Yale Lewis, the city's first RPS special counsel. (Lewis was fired in 2001 by Mayor John Powers.)
Lewis outlined a "civil conspiracy" that diverted public funds for private use. The plaintiffs' attorneys followed that trail, cited Lewis's findings in the process, and built upon it with a mountain of additional documents and witness testimony.
Along the way to handing Betsy Cowles and Nordstrom literally tens of millions of dollars in public subsidies, various players felt they were being asked to do things that were illegal, unethical, or simply unwise, according to the bondholders' compilation of evidence. That evidence shows public officials and lawyers working both sides of the public/private partnership succeeded, at the time, in keeping these disputes from the public. But their recorded differences created enough of a paper trail for the plaintiffs' attorneys to compile -- like Internal Revenue Service investigators before them -- a devastating case.
The gauntlet of key decisions reveal a project rife with irregularities and misrepresentations, a public/private partnership that should have been scuttled. Instead it went forward, as the plaintiffs allege, "using other people's money to create the potential for [Cowles companies] to profit."
Developer and newspaper publishing heiress Betsy Cowles couldn't do this on her own. To access the tens of millions in bond proceeds, she needed the assistance and acquiescence of many others. Notably, the lawyers who represented the various parties come from a virtual "Who's Who" of some of the state's biggest and most influential law firms: Witherspoon Kelley, Preston Gates & Ellis, Perkins Coie, and Foster Pepper.
By law, the bond offering required full disclosure of the material facts and risks of the garage transaction. Not surprisingly, the argument from bondholders' lawyers is that if the "Working Group" had disclosed the true facts and risks of the deal, the bonds would never have been sold. No investor in his or her right mind would have purchased a piece of Spokane's ill-fated garage.
A summary of bondholder allegations:
"INDEPENDENT FOUNDATION" WAS CREATED AS COWLES PUPPET
By October 1996 the project was in trouble. The city council had been chastened by a substantive critique of the garage by Laurent Poole of the Seattle-based Sabey Co., which at the time operated Spokane's Northtown mall.
Spokesman-Review publisher Stacey Cowles sent his sister Betsy a memo giving her much better information about the troubled status of the RPS deal than his newspaper was giving its readers.
"Council opinion," Cowles wrote, "now is that garage at $30mm [sic] is not a good deal."
As recounted in the bondholders' brief, Cowles informed his sister that Poole had "asked the questions that hit the mark" and done "an incredible amount of damage" to the Cowleses' plan. Bond purchasers never learned of those damning questions.
Within a week of Stacey Cowles's memo, a new financing plan was hatched: Cowles lawyers would form a nonprofit corporation -- the Spokane Downtown Foundation -- that would buy the garage from Cowles real estate companies "on behalf of" the city.
Under federal tax rules, the bond sale needed to be an arms-length transaction. The Foundation should have been controlled by the city, acting in the public interest.
Nowhere in the September 1998 offering statement for the bonds is it disclosed that the Foundation was created by Cowles lawyers and that, as city officials involved in the negotiations clearly understood, it was acting at all times as an agent of Cowles real estate companies. The buyer and seller had merged into one.
And yet, as the plaintiffs' filing points out, prospective bond buyers were told that the Foundation was an independent entity that negotiated the $26 million garage purchase price. Deposition testimony revealed the lie: the price was set even before the Foundation came into existence.
"The reality," plaintiffs attorneys wrote, "is the negotiations were only between the City (which unknown to investors so desperately wanted the project to 'save downtown' that it would do whatever the Developers told it to do) and the Developers, who got the money."
In the end, plaintiffs allege, the creation of SDF was intended to keep the transaction out of the public arena. They wrote: "Avoidance of a public vote was the driving factor for the extraordinarily complex strategy that facilitated the foundation's sale of $31.5 million of bonds."
CONFLICT OF INTEREST WAS HIDDEN
In discovery, the plaintiffs found out that the RPS developer hand-picked the three "independent directors" of the Spokane Downtown Foundation board. In early January 1997, the "three directors were advised by Developers that Preston [Gates & Ellis], and specifically [attorney Mike] Ormsby, would serve as the Foundation's general counsel."
Ormsby is a veteran civic and political player in Spokane, who served as the campaign treasurer for former mayor John Powers in 2000. Preston Gates & Ellis is the large statewide firm that served as both general and bond counsel to the SDF.
What the bondholders, the Spokane public, and even Yale Lewis were not told was that Mike Ormsby and Preston Gates & Ellis had been hired by the developer in 1996 for legal services in preparation for the expected bond sale.
This huge conflict of interest did not come to light, even though Ormsby sent two letters to city attorney Jim Sloane notifying him of the conflict and seeking waivers.
"The exact scope of Preston's representation of the Developers is unclear," plaintiffs' brief notes, "because the Developers instructed Ormsby not to answer questions concerning his communications with the Developers on grounds of privilege."
Still, it's clear enough that Ormsby and Preston Gates were working for both the buyer and seller in the garage transaction. The official statements for the garage bond offering, plaintiffs' attorneys note, has a section specifically devoted to conflicts of interest. Yet, nowhere does the offering statement "disclose the various and serious Preston conflicts."
DRASTIC REVENUE SHORTFALL WAS CONCEALED
The hefty $26 million purchase price for the garage rested upon optimistic revenue projections based on a projected number of mall visitors, their "length-of-stay," and their willingness to pay $1.50 per hour. Nearly half of those revenues were to come from patrons of the AMC 20-screen Cineplex at River Park Square.
AMC, however, believed it had been promised by the developer that moviegoers could park for free, a necessity if the downtown movie house was going to compete with suburban theaters. At the 11th hour, when the company learned its moviegoers would be charged for parking, AMC threatened to pull out of the mall.
After a flurry of meetings, a compromise was fashioned that called on the garage to reduce its evening parking rates.
However, this solution would take a huge chunk ($600,000 to $1.2 million a year) off the projections of garage revenues that had been provided prospective bond purchasers. Ormsby, working in concert with city bond counsel Roy Koegen, deputy city manager Pete Fortin, and PDA board president Terry Novak, tried to solve the problem by very politely suggesting Cowles "consider adjusting" her $26 million sum downward to account for the fact that the revenue projections on which it was based were no longer relevant. Cowles refused.
According to plaintiffs' attorneys, when this revenue crisis became apparent, Ormsby and the SDF should have called off the deal. At that point, bond proceeds were still being held in an escrow account established during garage construction. One condition of the release of funds was that there be no notice of default by a major RPS tenant.
"The AMC notice of default prevented the Developers from complying with this condition," the plaintiffs' attorneys write, "and Ormsby and the Foundation had the absolute right to refuse to close the purchase. However, Ormsby never advised his client, the Foundation, of this right." Had the Foundation exercised its right, they contend, the nonprofit could have withdrawn altogether from the transaction (and simply returned the money to bond purchasers) after Cowles made clear she wouldn't compromise.
The bondholders' ominous summary of the AMC episode: "Why Ormsby and the Foundation did not protect the bondholders is a question they shall have to answer at trial."
"FEASIBILITY" STUDY WAS A RUSE
In 1996 Walker Parking Consultants of Indianapolis was hired by the city to perform a condition assessment and financial feasibility study for the proposed garage expansion. As it turned out, Walker (with the city's knowledge) had previously worked for the RPS developer, producing a similar report but with much lower revenue forecasts. The "new" Walker report for the city, however, was the one given to bondholders. It contained grossly bloated revenue projections that went hand-in-hand with a doubling of the garage price ($15 million to $30 million) sought by Cowles companies.
"There was nothing nefarious about any of the various parties' dealing with one another," Walker's attorneys have insisted. "Downtown revitalization was going to be the result of a 'team effort.'"
That "team effort," plaintiffs' attorneys now allege, also involved Walker, city officials, and the other participants in the "Working Group" collaborating in 1998 to mislead investors about what the Walker report actually was and hiding glaring weaknesses in the Walker projections.
Perhaps the most serious misstep was that the Walker report was represented to bond buyers as a "financial feasibility analysis" when, in fact, it was not. The city had dropped the requirement that Walker independently test the assumptions "provided by the City or others" -- the others being, of course, Cowles's development team.
"Here," plaintiffs' attorneys say, "the investors were misled into believing Walker, a 'recognized expert firm' had prepared a 'financial feasibility analysis' when, in fact, all of the Defendants knew it was not." [Emphasis in original.]
The plaintiffs' attorneys use deposition testimony and documents to portray an almost comical game of hot potato in which all the participants in the Working Group backed away from taking responsibility for the assumptions and accuracy of the Walker report.
"The assumptions were bogus," plaintiffs argue, "and the entire Working Group, mere weeks before the bond issue, was scrambling to find someone to 'sign off' on the numbers. Ultimately, the City, desperate to get the deal done, bit the bullet and convinced [then deputy city manager Pete] Fortin to sign a certificate that he, personally, did not believe in, by word-smithing the document to provide that 'proper City officials,' but not Fortin personally, were providing the certification."
It's understandable why Fortin wanted to avoid responsibility for the transaction. As he and others have testified under oath, the city council had overruled his advice that Cowles be paid no more than $18 million for the garage. In any event, the plaintiffs' attorneys recount that Fortin, in his deposition, said he didn't personally believe the assumptions used by Walker were reasonable, nor did he know who the "proper city officials" were who did find them reasonable. Former city bond counsel Roy Koegen, in his deposition, opined that "proper city officials" meant the Spokane City Council and, specifically, finance committee chairman Orville Barnes.
Plaintiffs contend that Fortin, Koegen, and Barnes were clearly among those willing to go along with a shady deal and let someone else take the responsibility. In light of their research, bondholder attorneys argue that the developers and Walker "were willing co-conspirators with the City in the fraudulent conspiracy to defraud bond purchasers."
GARAGE APPRAISALS WERE A "SHAM"
The vastly inflated Walker revenue projections for the garage were then given to the city's contract appraisers. The appraisers, in turn, were then instructed (over the objections of city real estate manager Dennis Beringer) to inject the Walker numbers into a controversial appraisal method the city had never used before.
In this part of their brief, plaintiffs use the ample documentary evidence and deposition testimony showing that the "investment value" appraisal method used for the city was actually recommended by two Cowles agents, namely RPS project manager Bob Robideaux and former Spokane appraiser Derek Zimmer.
In their reports to the city, appraisers Dan Barrett and Auble & Associates noted they were instructed to use the Walker numbers, even though both raised serious questions about the Walker assumptions. Barrett, in his deposition, conceded that when the appraisal instructions were shared with the group of appraisers interested in bidding on the project, "everybody recognized" that "the desired result" of the approach was to arrive at a higher-than-market value number.
Barrett's report actually indicates how much higher that was. Accounting for the depreciation of the older part of the expanded garage, Barrett put the "market value" of the garage expansion at $12 million. But using the "instructed" investment value method with the fattened Walker income projections, his report put the investment value of the garage at just over $30 million. Auble put the investment value of the garage at $25.7 million.
"These Auble and Barrett Reports," plaintiffs conclude, "were presented to investors in the Official Statements as 'two MAI appraisals commissioned by the City' upon which 'the purchase price is primarily based.' Investors are not told the 'appraisals' were carefully orchestrated shams designed, as Barrett said, to achieve a 'desired result.' Nor are investors told that Auble and Barrett themselves were careful to note that their evaluations were, in fact, 'consulting exercises' and were not real appraisals."
COWLES CLEARED NEARLY $10 MILLION FROM BOND PROCEEDS
Plaintiffs' attorneys cite a November 1996 Bob Robideaux memo that indicates "the $26 million purchase price would net [Cowles companies] close to $10 million in excess cash that was not needed for construction costs." Yet financial information provided to bondholders reported that "construction financing" for the garage was "expected" to consume $20.7 million. (Camas estimates the total excess cash value built into the garage transaction -- including inflated "ground rents" -- comes to $25 million. See "Hocus Pocus.")
INSIDERS THOUGHT BONDS WERE TOO RISKY FOR "MOM AND POP"
Plaintiffs point out that all parties to the transaction (including several Spokane city council members) knew it was a dicey proposition but were being careful not to spook prospective bond buyers.
"Are we really going to sell this to Mom and Pop," reads a note taken by a lawyer advising Prudential Securities, the bond underwriter, at a February 1997 meeting. What this notation means, plaintiffs' attorneys say, is that Prudential and its counsel thought the RPS garage bonds to be too risky to sell to small investors.
The same day the above note was taken, they report, Prudential's Public Finance Business Review Committee had also concluded that "retail sales [of the RPS garage bonds] may not be appropriate."
"Investors were not told that the underwriter, who would be expected to know as much about the deal as anyone in view of its 'due diligence' responsibilities, had secretly concluded that it would not sell the bonds to any of Prudential's retail customers," the plaintiffs' statement reads. "Of course, that did not stop Prudential from selling the bonds to other broker-dealers and letting them sell the bonds to 'mom and pops'."
"GREED" WAS THE MOTIVATOR
The obvious question is why the garage deal went forward when there were so many reasons known to the Working Group why it should not. Plaintiffs have an answer:
"The reason no one spoke up was greed. The Developers wanted the many millions the inflated purchase price put in their pocket, the City was genuflecting to the Developers in order to 'save downtown' (as long as that could be done with someone else's money) and wanted to get reimbursed for $300,000 - $400,000 in 'administrative costs' out of bond proceeds and all the remaining members of the Working Group had a substantial financial stake in getting the deal done because they would not get paid unless the deal closed."
LET THE JURY DECIDE ...
To win their case against a long line of defendants that includes the city and Cowles real estate companies, the bondholders and the bond insurer who've signed onto the "Joint Omnibus Statement of Material Facts" don't have to prove a conspiracy. They only have to persuade a jury that the lawyers who fashioned the transaction acted negligently or that the public officials and others who helped orchestrate it knowingly withheld material facts from prospective bond purchasers.
In their defense, the city and other defendants have filed a variety of counter-arguments, collectively contending that no material facts were withheld but also trying to cast limits and caveats on their individual duties to disclose.
Pretrial jockeying will determine which defendants must stand trial and what charges, if any, they'll face. Edward Shea, the Richland-based federal judge assigned to the case, must sort this out as he works through a large backlog of summary judgment motions.
Nevertheless, a dramatic confrontation looms. If and how that confrontation will be reported by Spokane's Cowles-dominated media remains to be seen. Thus far, The Spokesman-Review and the city's broadcast stations have barely shown any interest in reporting on the factual discovery in the case and none at all on the pretrial legal maneuvering.
But the lack of Spokane media interest doesn't diminish the facts that have been compiled over the past two-and-a-half years. It especially doesn't change the anger and power of those who invested in Spokane by buying River Park Square garage bonds. They are beginning to converge on Judge Shea's courtroom. And they want their money back.
THE END
To download the entire bondholder document, click here.
Camas articles are researched, written and edited by the Camas staff: Tim Connor, Larry Shook and Judy Laddon.
Copyright © 2000-2009 by Camas Magazine