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Parking garage claims settled

Thu., Dec. 20, 2007

The IRS and a law firm for two Northwest attorneys involved in the River Park Square garage bonds have settled an investigation into the sale of bonds which were at the center of a federal securities fraud suit.

The settlement closes the investigation into allegations that the two attorneys, Mike Ormsby of Spokane and David Thompson of Seattle, did not perform “due diligence” on all aspects of the mall project before the foundation they represented sold $31 million in bonds to investors as tax-exempt.

The IRS Office of Professional Responsibility described the agreement as “groundbreaking” although the IRS and Kirkpatrick & Lockhart Preston Gates Ellis LLC, the firm for Ormsby and Thompson, said the agreement is not an admission of wrongdoing or a sanction. Conditions in the agreement for further review will make sure future sales comply with tax laws, the IRS said.

“We are pleased to have this matter resolved,” Piper Turner, a spokeswoman for KL Preston Gates, said Wednesday in reading the firm’s prepared statement.

Investors were told that the mall’s garage was expected to generate enough revenue to cover the principal and interest on bonds, as well as pay other expenses like operations and maintenance. Ormsby represented the Spokane Downtown Foundation, which was set up by Cowles development companies to sell the bonds and bought the mall’s expanded garage for $26.6 million when the renovation project was completed. Critics said the price was improperly inflated through an appraisal that estimated its “investment value.”

Thompson signed a letter for the firm that was included in the bond prospectus that said the interest on the bonds would be exempt from federal income tax.

But the garage, which the foundation purchased with the money from the bonds, was in financial trouble almost from the time it opened, and the bonds went into default. The garage spawned a tangle of lawsuits, including a federal securities fraud claim involving the city of Spokane and the mall development companies, which are owned by the same parent company as The Spokesman-Review, the foundation, and all the attorneys and advisers they had hired.

The IRS questioned the tax-exempt status of the bonds because of the complicated arrangements to spend potential revenue from the garage. Although the foundation fought that ruling, Preston Gates, the predecessor of the current firm, paid off the bonds’ tax liability as part of the settlement of the securities fraud case after the city of Spokane bought out the bondholders.

The headline on an IRS news release announcing the settlement called it “groundbreaking” without explaining the unusual nature of the agreement, and neither the IRS nor the firm would comment on why that term was used.

Turner referred all questions to the IRS, and the IRS said the news release “speaks for itself.”

A Dec. 6 report in the Bond Buyer, a publication that specializes in news in the bond industry, said it may be the first case of a settlement being publicized by the Office of Professional Responsibility, and quoted bond attorneys as saying it was extremely unusual and serious for attorneys to be named in a disciplinary case.

Information about the settlement also was included in documents filed last week as part of a Washington State Bar Association complaint against a former member of the Preston Gates firm, Jim McDevitt, who is currently U.S. attorney for Eastern Washington.

McDevitt is not mentioned in the IRS release about the settlement. But former City Councilwoman Cherie Rodgers has asked the bar association to sanction him for not revealing a potential conflict of interest for his role in River Park Square bond sales when he was nominated for the federal post. McDevitt has replied to Rodgers’ complaint by saying his part in reviewing documents connected with the River Park Square project was “very limited” and not a conflict of interest.

Rodgers and independent journalist Tim Connor submitted stacks of documents to McDevitt in August, hoping for a federal grand jury into whether people involved in the mall project violated federal corruption laws. McDevitt recused himself from the investigation because of his former position with Preston Gates and turned the documents over to the Justice Department. The investigation is being handled by members of the U.S. attorney’s office in Western Washington.

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