by Ted S. McGregor, Jr.
Somebody knows something. How do you find out what they know? In everyday life, you just ask 'em. But in the world of federal litigation, as in the case surrounding the River Park Square parking garage, you really, really ask 'em. Called the deposition phase, it has been underway since last summer, and it'll probably wrap up by late spring or early summer of this year.
Here's how it works: A witness to the doings that landed everybody in court sits down at a table in a conference room in some office tower. A dozen or so attorneys gather around to listen -- some ask questions, some make objections to how those questions are asked. The attorneys for the plaintiffs, the financial institutions that invested in the garage project by purchasing bonds, do most of the questioning. But the defendants are represented, too -- the City of Spokane, Walker Parking Consultants, Prudential Securities, R.W. Robideaux Management, the Spokane Downtown Foundation, River Park Square, Citizens Realty and Lincoln Investments and Asset Guaranty Insurance Company. There are even lawyers there representing the law firms named as defendants -- the city's former special counsel, Perkins Coie, which has been named by the city, not the bondholders; Prudential's firm, Foster, Pepper and Shefelman; and the Foundation's firm, Preston, Gates and Ellis. That's a lot of attorneys. They're all on the clock.
Witnesses recall everything they can about the events starting in 1995 and running through today. Some stuff is cut out of the public record because it is deemed confidential; some questions aren't answered because they would reveal conversations that are protected by attorney-client privilege. Each deposition goes on for two or three days. There are testy moments and corny jokes. By the time this phase of the litigation is over, the process will have been repeated perhaps 75 times to get testimony from every person who knows something -- witnesses and experts who will testify or be referenced in the trial scheduled for sometime after April 2004. Some are expecting the trial to last five weeks. The outcome will be decided by a jury.
Of course all that could change if mediation bears fruit in time to derail the case from its track to the courtroom. No attorneys involved will comment on that process on or off the record, but they do confirm that meetings to arrive at a solution have been ongoing. The most recent mediation sessions were held last Thursday and Friday in Spokane.
Meanwhile, depositions continue. Last summer, John Dorsett, the principal of Walker, was deposed. In recent months, depositions have been taken from Mike Ormsby, counsel to the Foundation; Bob Robideaux, the mall project manager; Duane Swinton, the developer's attorney; and John Moore, the lead executive from Prudential on the project. Still to come are Roy Koegen, the city's attorney on the project; former city officials Pete Fortin and Bill Pupo; City Councilwoman Roberta Greene; and former City Councilman Orville Barnes. Oh, and Betsy Cowles, owner of River Park Square -- she's on deck, too.
The transcripts are available through the city, and as you see the same lines of questioning repeated from witness to witness, it seems that a legal theory and possible courtroom strategy is emerging on the part of the bondholders. From what is known now, it seems to be quite different than what casual garage-controversy watchers might expect.
The garage fight has long been characterized as a dispute between the one-time partners in the deal, the city and the developer. There is a lot of truth in that view, as the two parties continue to struggle over the question of whether the city is bound to loan or give money to the struggling garage. But while that conflict generates the most headlines, the federal case (in which the city and the developer are co-defendants) seems to be boiling down more and more into a case of the bondholders versus the underwriters.
Gary Ceriani, the lead attorney for the bondholders, has been spending lots of his time in depositions discussing the Official Statement. That's the document generated to describe the project and how risky an investment it might be. Mutual fund institutions like the ones that ultimately bought the garage bonds use such documents to decide whether to invest. To help win his clients' money back in court, Ceriani seeks to find problems in the Official Statement. Honest mistakes are not enough; he's really interested in what can be proven to be outright falsehoods.
At one time it looked as if the bondholders would argue there was a conspiracy to defraud investors. In recent depositions, it's hard to find much evidence that they're still on that track. That doesn't mean they can't argue there was a conspiracy or something like it before a jury, but for now they seem content to poke holes in the Official Statement.
Underwriters of bonds are the backstop in the system -- bad deals are weeded out at the underwriting stage and never make it to market. If you're putting together a well-intentioned but fatally flawed financing package, the underwriter is supposed to save you -- and potential investors -- from yourself. Underwriters take on the responsibility of coming to a reasonable certainty that the information in the bond offer is accurate. For this they make pretty good money -- a point and a half on a $31 million deal, in this case.
To many defendants, however, the bondholders' case looks like sour grapes. Here they bought bonds rated BBB-, the lowest grade above junk bonds, and now they're complaining that the investment didn't pan out? Low-rated bonds offer better-than-usual returns, but every investment is not a sure thing. If you want a sure thing, watch the sun rise, don't play in the bond market.
For every investment that goes bad, it's easy to realize in hindsight how things could have been different. But shoulda, coulda, woulda arguments are not going to win the bondholders' money back. They need to prove that the articulation of risk was understated due to professional negligence or fraud. Sometimes, after all, professionals agree a deal looks great, using all reasonable measures, and it still fails. Prudential will argue that there are disclaimers and warnings throughout the OS, but expect the bondholders to argue they weren't enough. It'll fall to a jury to decide where to draw the line between adequate and inadequate disclosure.
It appears that Prudential may also argue that the OS was out of its hands. Moore testified that, "We contributed to [the OS's] drafting. We reviewed and provided comments. Maybe this is a semantics issue. But Prudential did not, quote, prepare the official statement."
They did, however, hire the law firm of Foster, Pepper and Shefelman to draft that statement. Moore also claimed that the Foundation and the city ultimately decided what did and didn't go in the OS. Getting bad information from others may be a partial defense, and a lot of people did have input to the OS, but at the end of the day, it landed on the purchasers' desks with Prudential's stamp of approval.
Ceriani is looking for places where the underwriter and other defendants knew or should have known the information in the OS was wrong. Along with attempting to paint the OS as incomplete in criticisms of the Walker Report, it looks like he's planning to exploit four specific passages.
1. In the official statement, potential buyers were told that the purchase price for the garage was negotiated between the Foundation, the developer and the city. But in his deposition, Swinton, the attorney for the developer, admitted that the Foundation only came into formal existence after the price had already been set.
Ceriani: So you would agree with me, sir, that no director of the Foundation was involved in the negotiation of the $26 million purchase price, correct?
Swinton: They did not engage in the negotiations that had occurred at this point in time, no.
Robideaux testified that the purchase price was negotiated with Koegen, the city's counsel, and Fortin, the city finance director. Swinton went on to say that the Foundation investigated the fairness of the price prior to the city's formally joining the project in January 1997.
2. Prior to putting the bonds up for sale, the project team approached Moody's, a rating agency, for an opinion. Moody's replied that it would not give the bonds an investment grade. Over at Standard and Poor's, another rating agency, the bonds were given investment grade -- barely, at BBB-. Seeking "opinions" without disclosing they were sought is a controversial part of the bond market, and was the reason River Park Square was discussed as part of a Wall Street Journal article on the practice. In the OS, in discussing the S & amp;P rating, it states that, "No application was made to any other rating agencies for the purpose of obtaining an additional rating on the bonds." Ceriani clearly thinks this isn't true, and that the "opinion" should be considered an additional rating. Moore, the project leader for Prudential, disagreed, testifying that, "Opinions do not need to be disclosed in that section."
3. The Walker Report, which is attached to the OS in its entirety, is referred to throughout as a feasibility study. But in some documents and testimony from Walker, it's clear that Walker didn't consider its work a true feasibility study (although the firm ultimately signed off on the OS's characterization of it as one). Ceriani seems to believe his clients were duped into thinking a feasibility study had been conducted when none actually had.
4. Also in Walker, the sticky issue of parking validation was addressed. The OS included the statement in the Walker Report asserting that "We understand that funds necessary to pay for any parking validation program are to be budgeted elsewhere, so are not included in this analysis." A lot of Ceriani's questions center on where those funds were budgeted. Swinton and Robideaux testified that the city was going to contribute to validation and that a new parking validation system was being developed. But it's pretty clear that there was no budget outlining in contractual terms that the money to pay validation actually existed. (For more on validation, see "Invalid Assumptions?" on page 12.)
While at this juncture it may not be looking great for Prudential, that could be good news for the other defendants. To the extent that Prudential allowed false information to enter the OS, it may be culpable -- and the greater its culpability, the less the rest of the defendants may be blamed.
Ceriani peppered Moore with detailed questions about the firm's internal checks and balances. Documents produced seem to indicate that questions being raised internally by Prudential executives were never adequately answered; company due diligence policies appear not to have been followed. Ceriani asked Moore why a variety of documents were not attached in their entirety to the OS, to which Moore often answered that they were "not material," which led Ceriani to comment at one point that it seemed all the documents critical of Walker were deemed "not material."
And it gets worse for Prudential. While the bondholders seem content to build their case methodically, Asset Guaranty Insurance doesn't appear to share their patience. Just last week, AGIC filed motions for summary judgment against Prudential -- that is, AGIC is asking the federal judge to declare Prudential liable right now. AGIC was approached by Prudential to insure a portion of the bonds, the ones that weren't purchased by institutions. Now they're being asked to pay the purchasers' claims. While the motion may not have success so early in the process, it offers an idea of where some of the attorneys are focusing their thoughts.
Attached to AGIC's motion is the declaration of Sally Campbell, the analyst in the underwriting department of AGIC who rendered an opinion on the garage bonds. "I was never provided any of the reports uncovered after AGIC's policies were written, which are critical of the Garage or the Walker Report, including the Auble and Barrett Reports, the Coopers & amp; Lybrand Report, the Sabey Report, or the Gonzaga Report," states Campbell. "AGIC would have wanted to know that Walker's Financial Feasibility Analysis was not a feasibility analysis and that Walker accepted the City's and the Developer's assumptions without testing them."
Like a lot of the fallout from the failing deal, it's kind of a sad story for Prudential. The firm wasn't even doing business in municipal finance at the time; they were trying to get back into it. Not surprisingly, they have since decided to stay out of it. Moore, who was deposed Sept. 16-18, doesn't even work there any more.
His answers also illuminate how some of the project leaders felt about the criticisms being raised in the community at the time. When quizzed by AGIC's attorney John Lowry about the Sabey Report -- yes, it has ascended to "Report" status in the opinion of some lawyers -- he said he requested a copy, but was never given one.
Lowry: Did you ever consider picking up the phone and calling the Foundation or the city or Koegen and saying: Look, I'm the underwriter of a $30 million bond issue and I want a copy of the Sabey Report. I've asked for it and you haven't given it to me. Where is it?
Moore: We considered the source. Sabey was a competitor of the facility. We were led to believe he was doing all he could to torpedo it along with others in the community... We felt it was extremely biased. And why bother? It's just more chatter and noise in the background.
Lowry: If you concluded that, why did you want to see a copy of it?
Moore: Curiosity. It had got the talk of the town.
After reviewing another document, Moore admitted to making one of the project's more ill-advised attempts at humor when he wrote in the margin: "Disclose David Sabey's efforts to derail our project? Just kidding."
It may seem like an innocuous joke, but you can bet if a jury ever gets empanelled in this case, the joke will be retold. In significant ways, the criticisms contained in a presentation made to the City Council in late 1996 by the Seattle-based Sabey Corporation, then owners of NorthTown Mall, turned out to be right on. Clearly, the bondholders don't think it was all that funny.
Two other key players in the deal have had their depositions taken, too -- Swinton (Oct. 21-23) and Robideaux (Nov. 11-14). As two of the more anticipated depositions, they were a little anti-climactic, perhaps due to the fact that nearly everything they ever talked about together remains protected by attorney-client privilege. But Robideaux might be up for an Academy Award after his performance. Through three days of testimony, he never revealed even a hint that he was having problems with his bosses at Cowles headquarters. The day after his deposition ended, however, he filed a lawsuit against them in state court, alleging that they owe him nearly $1.5 million in back wages and bonuses. Shortly after filing the lawsuit, he was fired. As a result, Robideaux has quite a tightrope to walk. Swinton, once Robideaux's attorney, is now his adversary in state court. (For more on Robideaux's lawsuit, see "Leaving the Fold," page 15.)
If tangled webs like this one make you think Spokane is strangely incestuous at times, the Denver-based Ceriani would probably agree. In one humorous parry with Swinton, he exploits that topic. In what appears to be a rehearsal for trial, Ceriani underlined some relationships between the various parties that might seem overly cozy.
Ceriani: Who is Mr. [Stan] Schwartz?
Swinton: He was an Assistant City Attorney.
Ceriani: Do you know where Mr. Schwartz is now?
Swinton: At this very moment in time?
Ceriani: Do you know where Mr. Schwartz is employed at the present time, sir?
Swinton: Yes, I do.
Swinton: He is employed at Witherspoon, Kelley, Davenport and Toole.
Ceriani: That is your firm, correct?
Of course Ceriani knows where Stan Schwartz works. Schwartz was an assistant city attorney who worked on the garage and went over to work at Witherspoon Kelley after the garage purchase was completed.
After that exchange, Swinton went on to say some surprising things. For a long time, critics have charged that parking was put under Nordstrom so it could help pay for the store construction. Swinton says that wasn't the case and that there was a separate ledger kept to maintain the distinction. He said the city was notified of prior relationships between his client and Walker and Ernst and Young, which provided some of the earliest pro formas on the deal. He also admitted that after the October 1996 city council meeting, when a second opinion was requested, he thought the whole deal was dead in the water.
Finally, when he was asked if, knowing what he knows now, if he would have done anything differently, he answered no.
Robideaux has been a more central figure in the deal, and he has always seemed capable of clearing up a few of its more persistent mysteries. At the outset, Robideaux admitted he had spent two-and-a-half days preparing for his deposition. It showed, as he skated through fairly successfully, giving little satisfaction to those hoping to pin one matter or another on him.
One of the strategies that came through in his defense involved pulling other players into his boat. Call it the human shield strategy. Robideaux has always been a central figure in the question about validation, since he was the one who was famously quoted in the Gonzaga Report saying that validation would be revenue-neutral. In his deposition, he denied being responsible for making that happen -- he claimed that he was simply passing along what everyone thought to be the case at the time. He says he regularly referred people who had questions about validation to Karen Valvano, who was working to create a new program.
The paper trail also shows Robideaux was privy to many of the "what-if" scenarios being run by Walker after the city adopted its formal report. Was Robideaux suspicious that revenues weren't materializing, and was he revealing the results of these what-ifs to others? In his deposition, he claimed that he rarely spoke to Walker himself, and that when he did it was at the request of Pete Fortin at the city. In one tantalizing Walker document, a handwritten note in the margin says, "What does rate need to be for project to be built?" Did this mean Robideaux and others were dictating rates to Walker? Robideaux testified that he never dictated rates, and he didn't recall ever saying anything to Walker about "what rate needs to be."
One of the more interesting passages has to do with the reception the garage received from shoppers right after it opened in August 1999.
Robideaux: Yes, when we opened the River Park Square Phase I on August 20th, shortly thereafter we had a tremendous whiplash from the customers over the parking rates and validation program that had just changed, you know, days or a couple weeks ahead of that time.
Michael Cillo (for the bondholders): What do you mean by a tremendous whiplash over parking rates?
Robideaux: I guess my staff could probably describe that better than I am, but some of the comments were, we are taking a lot of heat down here. They are the cashiers that were talking to the customers, hundreds in a day, hundreds.
Cillo: Hundreds of what?
Robideaux: People complained.
Cillo: About what?
Robideaux: About the parking rates and the validation program.
Cillo: What were they complaining about on rates?
Robideaux: When we first started getting the complaints I think the majority of the complaints related more to rates, but then as you went on it was evident that the majority of the complaints related to validation.
Then, at the end of the second day of depositions, he was asked why the garage has failed, and his long answer offers an insight to the thinking in the developer's camp. Along with acknowledging the impact of Nordstrom's managerial stumbles, and the confluence of 9/11, the falling stock market and the struggling local economy, he found other reasons for the failure:
"I think the change in government in Spokane that occurred primarily I think in '98, '99, 2000 has had a major negative impact on this community as well as River Park Square and the parking garage. Instead of having an environment of the different types of groups that originally started to work together to build a strong downtown community, it became very adversarial and very difficult for anybody to succeed in that kind of environment. That primarily stems from a change in the City Council members, it stems from a change in the position of mayor...
"The second thing I think that has had a major impact is the validation program. That validation program has had more far reaching impact than probably anybody really imagines...
"But I don't want to leave you on a negative, I also see a positive... AMC is extremely strong... You take a look at a Friday, Saturday night, we park, according to the staff report this morning (11/12/02), we parked over 15,000 cars in that garage on Friday, Saturday and Sunday... our indication is this year [AMC] will be substantially over a million people that are coming to River Park Square. So there are some real positives in the project, too."
What a soldier, sticking up for his project even as he knew he'd soon be losing the rank he'd held since first going to work for River Park Square in 1988. Two days after delivering this speech to a roomful of attorneys, Bob Robideaux filed his own garage-related lawsuit.
You can read all the stories published in The Inlander about the garage controversy, going all the way back to 1995, on our Web site (www.inlander.com).