Tim Connor recently appeared on the Mike Fitzsimmons Radio Show on KXLY 920AM. Mike’s opinion is that there has to be someone better qualified than Ormsby. Mike advised his listeners to call Sen Patti Murray (here) and Sen Maria Cantwell (here) and ask them to withdraw Ormsby nomination. Mike also said to contact US Representative Cathy McMorris Rogers (here) to express concern about Ormsby’s nomination.
Ron the Cop
The Case Against Mike Ormsby’s nomination for U.S. Attorney
By Tim Connor, former Senior Editor, Camas Magazine
Spokane attorney Mike Ormsby, the brother of state Representative Timm Ormsby, has been nominated by Senator Patty Murray to be the next U.S. Attorney for the Eastern District of Washington. If he’s confirmed, Ormsby will succeed Jim McDevitt, a Republican who, coincidentally, worked alongside Ormsby in the Spokane offices of Preston, Gates & Ellis (now K&L Gates) in putting together the fraudulent River Park Square garage transaction in 1996 to 1999.
The beneficiary of the corrupt RPS transaction was the family that publishes Spokane’s only daily newspaper, the Cowles family.
This backgrounder looks at Ormsby’s roles. It draws heavily upon my reporting and Larry Shook’s reporting at Camas Magazine but, as you’ll see, the primary source I’ve relied on here is the lengthy 2004 report by the Internal Revenue Service’s Tax Exempt Bond Unit. The IRS-TEB report names and criticizes Ormsby repeatedly for his role in organizing and facilitating activities that violated federal tax rules in order to deliver $10 million or more in illicit bond proceeds to the Cowles family.
The Bond Buyer publication reported in December 2007 that the IRS TEB subsequently referred Ormsby’s name to the Service’s Office of Professional Responsibility for disciplinary action because of his role the RPS transactions. IRS-OPR responded with four separate allegations of unethical and “disreputable” conduct that resulted in a settlement with Ormsby and another Preston attorney David O. Thompson. As part of the settlement, according to the Bond Buyer, IRS publicly named Ormsby and Thompson.
The consequences of the River Park Square frauds fell most heavily on the City of Spokane because of a successful federal securities fraud action brought by Nuveen, Vanguard and other RPS garage bond purchasers. Even though Ormsby and McDevitt’s firm settled their liability for $1.3 million (with an agreement to also cover the tax liability for bondholders) the City of Spokane was nonetheless stuck with approximately $40 million in principle and interest payments to finance the settlement with garage bondholders.
BACKGROUND
Public corruption was at the heart of the River Park Square transaction. The beneficiary was the Cowles family, which publishes Spokane’s only daily newspaper, owns its NBC-TV affiliate, and has vast private holdings in the Spokane-area, including valuable real estate in the City’s downtown core.
In 1995, the Cowles family approached Spokane officials to seek their help in expanding and rebuilding the family’s River Park Square shopping center adjacent to City Hall and Riverfront Park. Embedded in this public/private partnership was an unlawful scheme to remodel a downtown parking garage owned by the Cowles family, manipulate its value by rigging new appraisals, and then transfer the garage to a public entity (backed by the City of Spokane) so that upwards of $10 million in illicit profits would flow to the family-owned development company.
Mr. Ormsby’s role was to broker the garage transaction. As bond counsel and lead attorney for the entity that financed the sale with a $31.5 million tax exempt bond issue, Ormsby helped put the deal together and played a pivotal role in proceeding with the transaction when it was clear that he and others knew, privately, that it wouldn’t work. He then helped to try to cover it up by signing a confidentiality agreement in which he promised to keep secret a document that was clearly a public record under Washington’s open public records law. City officials and developer Betsy Cowles repeatedly defended the garage transfer as an arms-length transaction. But the evidence is overwhelming that it wasn’t.
“It is clear from the facts of this case,” IRS investigators wrote in their June 2004 report, “the [RPS] developer had, and continues to have, a particular relationship with the City of Spokane and the Issuer/Foundation such that it was in a position to control or influence its activities.”
Mr. Ormsby was at the forefront of enabling the “particular relationship” so that the Cowles family could reap millions in illicit profits from the deal, at public expense. Bondholders got their money back because they sued, successfully, for securities fraud. Spokane taxpayers were not so lucky and remain on the hook for the tens of millions of dollars it took for the City to settle claims against it by bondholders.
SPECIFICS
Here are the basic facts as gathered by Camas Magazine, KXLY-TV, the Internal Revenue Service’s Tax Exempt Bond Unit, and lawyers representing Nuveen, Vanguard and other RPS garage bondholders who successfully sued the City of Spokane and other parties for securities fraud in 2001.
*In 1994 to 1996, the financial ground rules for the River Park Square project were conceived, in secret, by members and political/business allies of the Cowles family. In addition to the $22.65 million federally-backed loan the City extended, the family also wanted tens of millions in cash for the garage, even though the actual costs were less than $13 million and an appraisal commissioned by the City put the market value at just $12 million. The garage’s market value, by the IRS’s calculation, “at best was $15 million.” Yet, the Cowles family insisted on receiving at least $26 million for the garage, plus continued, grossly inflated payments of “ground rent” on the facility. The financing of the fraudulent garage transaction was via proceeds from tax-exempt bonds. The bonds were sold in 1998. The garage changed hands in late 1999.
*As the U.S. Internal Revenue Service reported in June 2004, the River Park Square garage project violated numerous provisions of federal tax law, including restrictions that limit the enrichment of private developers with tax exempt bond proceeds. IRS found that the transaction was also replete with “concealment” and “public deception,” the purpose of which was to “unjustly enrich and profit” Cowles family real estate companies.
*The overpayment for the garage and land rent was generated by fraudulent appraisal practices that were, according to IRS, “a notch in the post of public deception” and structured so that no matter how the transaction unfolded, the Cowles family would take millions of dollars in excessive profits while the city and taxpayers would be left with the risks. As the IRS put it in its report, “the casino was rigged.”
*Mike Ormsby played several key roles in the River Park Square transaction.
1) In August of 1996, Ormsby was contracted by the River Park Square project director to work directly for RPS on the garage project, advising RPS on bond financing issues related to the garage transaction.
2) The Spokane Downtown Foundation (SDF) was created as a Washington state Nonprofit Corporation in November of 1996 by lawyers working for River Park Square. The sole purpose of the SDF was to issue bonds and buy the River Park Square garage, “on behalf of” the City of Spokane, from the Cowles family. As the IRS noted in its report, Cowles family representatives recruited Ormsby to be the SDF’s lawyer. In addition, Ormsby’s firm, Preston, Gates & Ellis, was hired to be bond counsel to the SDF and, thus, had primary responsibilities to the SDF and to securities buyers for ensuring the bond issue complied with Securities Exchange Commission (SEC) and IRS rules governing the transaction.
3) When Spokane Mayor-elect John Talbott raised questions about the wisdom of the $22.65 million HUD-backed loan to the Cowles family in late 1997, Ormsby lobbied the office of U.S. Senator Patty Murray to encourage her support for the loan. He did this with a lengthy December 3, 1997 memo to the Senator’s Eastern Washington representative, Judy Olson. The memo did not disclose Ormsby’s role in the River Park Square garage transaction and the fact that he and his firm expected to receive more than $83,000 in bond proceeds for his work and the firm’s work on the garage transaction.
4) As bond counsel for the bonds issuer, Ormsby and his firm had clear duties to disclose all material facts regarding the garage transaction. But key material facts known to Ormsby were not disclosed. Among them:
a) The bond issuer, the SDF, was created by agents acting at the behest of RPS developer Betsy Cowles.
b) Ormsby’s work directly for River Park Square (the seller) before becoming the lead counsel for the SDF (the buyer) was not disclosed. (Indeed, in October 2003, the SDF board filed papers in federal court alleging that Ormsby had not disclosed–even to them–his prior work for River Park Square on the garage transaction.)
c) The official statement for the bond issue indicated that the SDF had participated in negotiations over the purchase price of the garage. But, as IRS noted in its report: “the price was determined prior to the issuer [the SDF] being created.”
5) Ormsby had been working closely on the RPS garage transaction for three years when a dispute between RPS and a major mall tenant, AMC Theatres, threatened to blow up the whole deal. In short, AMC had just learned that its customers, as part of the garage transfer, would no longer be allowed to park for free in the garage. This was critical because about half the garage revenues, beginning in 1999, were expected to come from AMC customers. Indeed, the garage purchase price of $26 million was predicated on AMC customers paying $1.50 an hour to park. To solve crisis, the new public entity operating the garage decided, with encouragement from RPS, to slash evening parking rates to placate AMC. But this solution presented a huge cash flow problem, putting the investment of garage bondholders at risk. It also clearly put City taxpayers at risk because part of the inner workings of the complicated garage transaction was a lien against City parking meter revenues that was needed to give the bonds an investment grade rating from Standard & Poors. A plan was worked out whereby Ormsby would make an appeal to the RPS developer to adjust the $26 million purchase price downward, to compensate for the severe drop in forecasted garage revenues caused by the evening rate reduction. As Betsy Cowles bluntly reported in her deposition in the RPS securities fraud proceedings, her answer was “no.” And, yet, Ormsby and Preston Gates went ahead with the transaction anyway, without notifying the public or garage bond purchasers.
6) Ormsby also directly participated in a cover-up to help ensure that the public, and RPS critics on the Spokane City Council, did not learn of the AMC crisis before the garage transaction was completed in the fall of 1999. On behalf of the SDF, Ormsby secretly agreed to a reimbursement agreement whereby RPS would compensate for the loss of parking revenue but only if AMC “vacates the premises covered by the lease.” There was no provision in the secret agreement to compensate for the expected $1.2 million annual loss of parking revenue caused by the the rate reduction. Simultaneous with the reimbursement agreement, Ormsby signed a contract with RPS promising to keep the agreement secret, provided that RPS agreed to pay any court fees and penalties associated with the withholding of the document in violation of the state’s open public records law.
Here’s how the IRS characterized the overpayment and the secrecy agreement in its June 2004 report: “The direct result of the payment, the concealment (confidentiality agreement) and the certification by the developer on the purchase agreement unjustly enriched the developer with $10 million or more dollars of the Issuer/Foundation assets.”
Again, IRS unequivocally concluded that Ormsby played a central role in the payment and the concealment.
It’s regrettable that Mr. Ormsby wasn’t prosecuted, criminally, for fraud given the well-documented evidence of his involvement in the RPS garage transaction. (I continue to believe that his former law partner’s appointment as U.S. Attorney in 2001, discouraged a meaningful and timely criminal investigation.)
According to the Bond Buyer publication (December 2007), however, the IRS Tax Exempt Bond Unit did refer Mr. Ormsby and David Thompson, another Preston Gates attorney, to the IRS Office of Professional Responsibility for disciplinary actions related to the RPS transaction. The Bond Buyer reported that IRS-OPR subsequently alleged that Ormsby and David O. Thompson of Preston Gates committed four ethics violations involving lack of diligence, conflict of interest, failure to uphold standards for tax return positions, and incompetence and disreputable conduct.
The allegations, according to the Bond Buyer, were settled with an agreement that the two lawyers would be publicly named and that they would agree to added oversight and documentation of their due diligence activities on transactions. Although IRS described the agreement to the Bond Buyer as “groundbreaking,” it appears not to have been “groundbreaking” enough to have removed Mr. Ormsby from consideration as a U.S. Attorney.
Documents cited in this piece, including the 2004 IRS report on the RPS garage fraud, are available upon request from the author.
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