by Ted S. McGregor Jr.
In the past year, the dynamic of the River Park Square litigation has changed significantly. And like so many other problems facing us today, you might as well blame it on Enron.
Now that it has become clear that relationships between independent consultants and their clients aren't what we once thought, the garage litigation has become much easier to understand. That could translate into the way attorneys will craft their arguments, and it certainly will impact the kind of jury that will be empanelled -- if the case ever goes to trial. When jurors have to sort out capture rates, debt service ratios and official statements, their eyes just might start to glaze over a little bit; but if they're told it's all kind of like Enron, they'll understand.
The parallels are not absolute, but they are striking. In Enron's case, the accounting firm it hired to look over its books independently appears to have given a wink and a nod to illegal practices. Why? As near as anyone can tell, it was to keep the gravy train called Enron rolling -- because Enron's endless assignments were a consultant's dream. The firm, Arthur Andersen, was convicted of improperly shredding evidence and has been literally destroyed as a company.
In the saga of River Park Square, one of the enduring questions has always centered on the independent consultant hired to examine the deal, ostensibly to judge its soundness as an investment. Subsequently, evidence has emerged to suggest that Walker Parking Consultants was not independent, causing its reports to be badly flawed. Today, like Arthur Andersen, Walker, leader in its field with 300 employees, is fighting for its continued survival. If enough blame is put on its shoulders, it could go down with the garage it once predicted would do just fine.
At least, that's what everyone has thought the Walker report of 1996 had predicted. Since early 2000, when Walker Principal John Dorsett gave The Inlander a brief phone interview, he and his firm have kept mum on the controversy (although Walker documents were released in April 2001 as part of discovery in previous legal proceedings.) Just last month, however, as court-ordered mediation got underway, Dorsett was deposed over three days by the attorneys involved in the federal lawsuit. One of his most noteworthy statements was that the Walker report he co-authored was no feasibility study at all. Consider this exchange from the July 16 session with Dorsett and the city's special counsel, Laurel Siddoway:
Siddoway: [Under] project objectives, it says, "The city needs to know whether entering into the purchase or lease purchase of River Park Square garage is a sound financial move." Is that your understanding of what the city was looking to Walker to answer?
(Objection, for the judge to take note of when he reads the transcript)
Siddoway: No? Why not?
Dorsett: I think they already had their mind made up that this was a project they were going to do regardless of what our report said.
Siddoway: There is nothing in the feasibility study that opines as to the feasibility of the project?
Dorsett: That's correct.
Siddoway: Why is that?
Dorsett: We weren't, that was not a requirement of the project.
Siddoway: Determining feasibility was not a requirement of the request that you prepare a feasibility study?
Dorsett: We were told after we had started the project that they did not need us to project debt service on the project. We were told that we didn't need to get into debt service coverage projections for the project. Those are the measures of solvency for this project. And because those particular items were not required, this does not constitute a feasibility study report.
A little later, Dorsett offers a new name for the work his firm had done:
Siddoway: So are you telling me that in carrying out the scope of your work, even though the engagement was to prepare a feasibility study, that Walker Parking Consultants by its own admission did not prepare a feasibility study?
Dorsett: We prepared a financial analysis. Without the solvency measures, it does not constitute a feasibility analysis. There is nothing in the report that says this project is going to pay for itself.
The significance of all this is that the Walker report was the single most influential document in the entire transaction. It was cited as the reason the city felt comfortable joining the project, and it was used to set the purchase price of $26 million (which now looks to have been quite inflated). Others relied upon Walker, too, like those who purchased the bonds; those institutions saw Walker's revenue numbers used in the bond prospectus' official statement to estimate the future income of the garage. Now, with three years of the garage's performance to look at, Walker's report has been proven to have been, well... not even close.
And despite Dorsett's claims about what his report was and wasn't, it was called a "feasibility study" throughout the process -- both in the city's contract with Walker and on the official statement bondholders relied upon. So whether he viewed it as a feasibility study or as something less may not add up to much of a defense, as illustrated by another exchange on July 18:
Siddoway: You testified that based on your discussions with city staff that the city was interested in going forward with this project. And certainly the city didn't dispute that many city officials and staff viewed this as a very desirable retail project that it wanted to have go forward. But is it your testimony, Mr. Dorsett, that the city ever suggested to you that they wanted to go forward and support this project at any price?
Dorsett: That was never presented to me in that manner, no.
Siddoway: In fact, they hired Walker to do a condition assessment and a feasibility study, didn't they?
Siddoway: If they were interested in going forward and supporting the project at any price, they wouldn't have needed either, would they?
Dorsett: Not necessarily.
Dorsett does clear up some lingering questions about how Walker came to use the numbers it did. While some had believed it was using its own expertise gleaned from hundreds of projects around the nation, Dorsett testified that some of the key numbers came not from their own fact-gathering efforts but from the development team -- city officials Dave Mandyke and Pete Fortin and River Park Square Manager Bob Robideaux. Even Coopers and Lybrand, which checked over the Walker report in late 1996 and early 1997, questioned the assumption that shoppers and theatergoers would park their cars for an average of three hours. Rather than coming from some national average, Dorsett says it started with the garage's existing length of stay -- 1.9 hours -- and was somehow just rounded up to three. Even though they were supposed to be the consultant, Dorsett defended the decision on the grounds that the development team agreed to the figure. Later he admitted that no one ever verified the basis for the 1.9 hour figure, provided by Bob Robideaux, the agent of the mall's owners, the Cowles family.
In fact, a lot of time was spent in the deposition on Walker's relationship with Robideaux. Since he was representing the seller of the garage, some lawyers seemed to suggest in their questioning that his close working relationship with Walker constituted a conflict of interest. Dorsett testified that he didn't see one:
Siddoway: In fact, were there occasions when Mr. Robideaux provided you with information and you interpreted that information as coming not just from Mr. Robideaux, but being provided by him on behalf of the development team?
Dorsett: I think that Mr. Robideaux was acting on behalf of the development team when he provided the assumptions, and I had no reason to believe otherwise.
Siddoway seems to be laying the foundation for arguing later that the city was duped because it thought it was getting an independent analysis, when it was getting a report micromanaged by the developer's agent. But Robideaux's lawyer was there, too (he is represented separately from the Cowles), and he attempted to downplay those charges. Attorney Peter Vial pointed out that Walker was specifically instructed to "interview" the developer in the contract it signed with the city.
And Vial sets up an explanation of the "revenue-neutral" issue. Robideaux is on record saying that whatever validation program chosen for the garage would be revenue-neutral, an assertion that even wound up in the official statement. It's always struck some as a crazy thing to say, since validation programs are anything but revenue-neutral -- such programs cost real money. If the developer or the city have to pay anything into a validation fund, that has to be counted as a part of the cost of the project. Vial gets Dorsett to agree that "revenue-neutral" could mean that somebody outside the project would fund the validation program, like the tenants or downtown business owners in general. By the time the mall opened, however, no validation program was in place. Whatever specific explanation Robideaux has for his statement will likely come out when he is deposed.
But don't be surprised if Robideaux's attorney argues that his client was thwarted in implementing the validation program due to shifting political winds, as hinted at in this exchange:
Vial: In your experience all across the country, does it make sense for a developer to go into a downtown parking redevelopment unless it has got the city on board with it?
Dorsett: I think the developer would be advised to have the city on board with it.
Vial: Or else what might happen?
Dorsett: Some bad things could happen.
Vial: ... if you get political leadership that opposes redevelopment, what impact does that have on the success of a parking garage downtown?
Dorsett: It would probably kill the development.
Along with whether there was a conflict of interest and whether the "revenue-neutral" assertion could be backed up, another issue the city and others would like to tie to Robideaux and the developer are some handwritten notes on a Walker document. In what appear to be notes taken by Dorsett during a phone call, it reads, "What does rate need to be in order for project to work." Siddoway sees it as proof that somebody -- Robideaux perhaps -- called Walker and told them to just give them the number that would make the project pencil out. Bolstering her theory is the fact that within the week, two new scenarios had been faxed over to Robideaux by Walker, including the $1.40 per hour reimbursement rate that ultimately wound up in the Walker report (meaning the garage could somehow collect $1.40 for every hour parked in the garage). After Dorsett said he couldn't recall whether the note was from his own mind or just what someone told him, Siddoway followed with:
Siddoway: They ask you to get him something, he is concerned about rates, within a week you fax him two rate scenarios. Wouldn't you in fact, Mr. Dorsett, deduce that what you were doing was running different rates to see if you could get a revenue number that would make the project work?
Dorsett: I may deduce that (nods head affirmatively).
Later, after the city had agreed to join the project, but before the bonds were put up for sale, Robideaux hired Walker to run some new numbers which scaled back the garage's income significantly. Siddoway and others questioned why Walker's subsequent revised report didn't include those updates for the bond prospectus.
On another front, Vial seems to have put to rest a nagging issue, that the developer kept its prior relationship with Walker a secret from the city. Walker had done some work on the River Park Square project as far back as 1995, and Vial cited a letter to the city's then-Director of Finance Pete Fortin that cites Walker's previous relationship with the developer.
Robideaux's defense wasn't the only one to come into clearer focus over the three days. The underwriter of the bonds, Prudential, tipped its hand a bit, too, as its attorney Christian Oldham pointed out that the Walker report contains five passages stating that the report was incomplete due to the lack of a validation program to plug into the projections. Prudential is the firm that underwrote the bonds, and it is being accused by the bondholders of not being diligent enough to sniff out the failings in the garage plan. Oldham seems to want to argue that there were plenty of disclaimers in the Walker report and the official statement, and that sophisticated buyers like the Vanguard Fund should be able to judge risk on their own.
The validation issue was perhaps the most discussed issue in the three-day session. Dorsett expresses some exasperation that his firm asked again and again for details on the validation plan, but none ever materialized. Still, rather than saying they could not calculate an accurate forecast without it, they went ahead and issued their revenue projections. One problem with that approach, as Dorsett admitted, is that the 85 percent capture rate his firm used to determine how many mall users would park in the garage was completely dependent on a validation program. Without some subsidy to make the garage competitive, drivers will seek out cheaper parking.
And despite all the apparently shoddy work and questionable ethics, borne perhaps out of a desire to land future contracts, it's hard not to sympathize a little bit with Walker. It's kind of like the sad feeling many had when Arthur Andersen's thousands of employees took the fall for some incredibly bad decisions made by a few managers. As Dorsett says, much of the mall that they were visualizing has not come to fruition, from a food court with only two tenants to a rate structure that looks nothing like what Walker based its calculations on. His report, Dorsett testified, is only valid under the specific criteria outlined within. Still, when the city needed a harsh critic, it got an enabler -- the garage couldn't make $1.40 an hour or get people to park there three hours, on average, and that's what Walker was hired to find out. Instead of testing the assumptions, Walker appears to have been simply plugging in numbers.
The moral of the story for Walker seems to be, if you don't have your numbers nailed down, don't let them be used on an official statement in a bond issue. Walker has professional insurance for such miscues, but not in the amounts that are being bandied about. Consequently, you probably won't find a more eager player at the mediation table than Walker.
But the deposition shows there are plenty of failings to go around. Although Dorsett testified that the city pushed for a tougher contract than Walker usually signed, city officials, along with their outside bond counsel, still failed when they accepted the report without asking additional questions about the validation issues and how Walker was arriving at its conclusions. Later, the city failed in ignoring the Coopers and Lybrand report, which called the Walker report into question.
Prudential, the underwriter, failed for not double-checking Walker's work. Dorsett even testified that he never received a phone call from Prudential to go over the numbers prior to the official statement being finalized.
The bond buyers failed in not raising some internal red flags after reading the risks listed in the official statement for bonds that were rated just one step above junk status.
And the developer failed in getting too close to the deal at a crucial time, intentionally or not, contributing to bad numbers in such a way that eventually led to the garage's failure and this conflagration of lawsuits.
If this qualifies as an indictment of big business in the go-go '90s along the lines of Enron, the epitaph might read: Due diligence is always somebody else's problem. Nobody seems to have taken the time to read the fine print. Unfortunately, now somebody -- or perhaps everybody -- is going to have to pay.