Two theories compete at trial
RICHLAND – Responsibility for paying off the multimillion-dollar legal mess spawned by the River Park Square garage may hinge on which theory a federal jury believes of what went wrong.
There’s the city of Spokane’s view: Its former bond counsel Roy Koegen and his firm had a duty to stop city officials from the mistakes they made, from setting an inflated price on the parking facility to providing misleading statements and outright falsehoods to investors who bought garage bonds.
And the bond attorneys’ view: There’s nothing wrong with what investors were told, but plenty wrong with what the city did. City leaders created the problems when they reneged on a promise to help shore up garage finances.
The nine-person jury will hear the details of both points in exacting detail over the next five weeks. Friday, they heard attorneys for each side preview the legal malpractice case that pits the city against one of its key advisers, and give their own Cliff’s Notes version of a controversial project that has roiled Spokane for nearly a decade.
The garage is part of a $110 million renovation of the mall, which was proposed in the mid-1990s by Cowles development companies and supported by city officials as a way to stem the decline of the downtown retail sector. Part of the money for the renovation came from bonds that were sold in 1998 to buy the expanded garage from the developer.
The mall is owned by affiliates of Cowles Publishing Co., which also owns The Spokesman-Review.
Laurel Siddoway, one of the city’s special attorneys for River Park Square matters, started by admitting that investors who bought some $29 million worth of garage bonds were misled.
The garage’s purchase price was inflated, its revenue projections were “totally bogus” and warnings the city received about potential problems weren’t included in the Official Statement given to investors before they bought bonds, she said. If the statement had been correct and complete, the bonds would never have been sold and the suit never filed.
“He knew the information sent to the investors did not tell the truth,” Siddoway said of Koegen, who was involved in discussions of the mall renovation from the beginning. “The city had been sold out by its own law firm.”
She also suggested Koegen had a financial motive for pushing the bond sale, noting that he would receive a $250,000 fee from the sale: “The only way that Mr. Koegen could be paid was if the bonds were sold.”
But Ralph Cromwell, an attorney for Koegen and the Perkins Coie law firm, said the city was trying to punish a loyal worker whose advice it ignored.
“Nobody cared more about the city of Spokane than Roy Koegen. Nobody tried harder to get the city what it wanted,” Cromwell said.
Elected city officials settled on the higher price for the garage, Cromwell said, after Koegen told them not to pay more than $18 million. The official statement for the bonds was reviewed by city officials, the developer, attorneys for the non-profit foundation that sold the bonds, the bond underwriter and a rating agency as well as Koegen.
“Everybody who looked at it thought it was OK,” he said.
When a political sea change resulted in a majority of the City Council opposing the project, Cromwell said, Koegen told them in writing they faced legal problems if they refused to honor a city ordinance that called for a loan from city parking meter funds, including a possible lawsuit from bondholders.
The investors did sue, in 2001. The legal malpractice case is all that is left of that suit because the city bought back the bonds last year and reached settlements with others connected with the mall project.
But the bondholders never sued Koegen, Cromwell noted. Instead, the city filed a claim against him and Perkins in response to the investors’ claim.
“The city turned around and sued the man who told them ‘Don’t (refuse the loan),’ ” Cromwell said.
At times, the attorneys seemed to be giving the jury a crash course in the intricacies of the bond market by explaining such things as ratings, underwriters and levels of risk.
The garage bonds were sold with a rating of BBB- from Standard & Poors, which Cromwell called “a notch above junk bonds.”
The first witness called by the city was Benjamin Stairs, an analyst who reviewed the project before the bonds went on the market, and recommended that some should be purchased by Nuveen, the financial firm where he worked. Nuveen did buy bonds, and later became the lead plaintiff in the fraud lawsuit.
Stairs said he might not have recommended the garage bonds if he knew the purchase price was significantly higher than its market value. The Official Statement said it was based on Investment Value, which it didn’t define and Stairs said he assumed was close to market value.
“The value of the garage is very important,” Stairs said, because if things go wrong, the investors could always take possession of the garage, sell it and get their money back.
The Official Statement also seemed to minimize potential problems or concerns about the garage and mall project, Stairs said. It did mention reports from accountants and appraisers had disagreed with the revenue projections, and some of the public controversy surrounding the project. But it didn’t include them.
“Everything in my recollection was downplayed,” Stairs said.
But under questioning from Karl Oles, another of Koegen’s attorneys, Stairs also said he can’t recall asking to see any of the reports the city had with criticism of the project.
He also said the city’s ordinance to loan money from its parking meter fund was a key to his recommendation to buy the bonds because it suggested the city officials “would do anything they could to make sure it was a success.” He wouldn’t have recommended Nuveen buy the bonds without that pledge, and doesn’t think the firm would have sued if the city had kept it.
Stairs said he knew of a few cases in which cities had balked at living up to such a pledge, but this is the only one in which the city went through with that decision.
The trial is scheduled to resume Monday morning with testimony from the lead consultant from the firm that projected revenues for the garage that turned out to be far below what the facility earns.