The Holmes Harbor Sewer District in Washington State, four of its former commissioners, and two bond counsel have tentatively agreed to settle with bondholders in a lawsuit over $20 million of bonds that were sold in October 2000 to finance an office park, but were later found to have been illegally issued, a lawyer for the bondholders said yesterday.
The tentative settlements are with the district, former commissioners Don A. Cardner and his wife, Don Wills and his wife, Linda Zolt and Heather Ann Koch, as well as Michael W. McCall and Charles J. Tull, who served as co-bond and disclosure counsel for the bond deal, Hoff said. The district indemnified the former commissioners and will be making settlement payments on their behalf, he said. The settlements would leave U.S. Trust & Co., the trustee for the bond issue; Prudential Securities Inc., Wedbush Morgan Securities Inc., the two broker-dealers that sold the bonds; and Terry Martin, the developer, as defendants in the lawsuit.
Hoff said he expects to file the proposed settlements with Washington state court Judge Alan Hancock in January for approval. Hoff would not comment on the total amount of money to be paid under the settlements, but one source said that it will probably be a seven figure number, over $1 million.
Hoff disclosed the settlements during a teleconference hearing with Hancock and lawyers representing the defendants on Monday to discuss whether the trial of the bondholders in the case should be bifurcated. While bondholders asked the judge to consider first trying bondholder claims against either U.S. Trust , or U.S. Trust and the two broker- dealers, the firms urged that all of the charges in the case be heard at once.
Hancock ruled Monday that the trial, which is scheduled to start on Aug. 10, 2004, will be conducted in two phases, Hoff and others said. The first phase will be to hear bondholder charges against the defendants who have not settled the charges. Defendants are expected to be U.S. Trust, Prudential, Wedbush and Martin. Martin is facing criminal and civil charges that Justice Department and Securities and Exchange Commission filed against him and other parties to the bond financing in August.
Hancock's ruling was a victory for the bondholders. "We are pleased with the ruling because it means that the trial will be handled with more efficiency and less chance of juror confusion," Hoff said. "Our concern was that the jury was going to be confused if we had our main claims and then their cross claims. This will simplify things."
The bondholders will not be involved in the second phase of the trial. Hancock said the second phase of the trial would be to hear the cross- or counterclaims that U.S. Trust, Prudential, and Wedbush have filed against Martin and other parties to the bond financing.
Meanwhile, Martin and three other defendants in the SEC's civil suit over the bond financing have asked Judge John C. Coughenour, a federal judge in Seattle to delay action on the SEC suit until the criminal proceedings are completed. John H. White, who was to arrange private financing for the project, filed the motion. White was joined by Martin, J. David Smith, Martin's attorney in the bond deal, and Edward L. Tezak, a colleague of White's. The SEC did not oppose the motion. Coughenour has scheduled a status conference for Dec. 2 to discuss the motion and is expected to rule on it by Dec. 5.
The Justice Department has filed 20 counts of conspiracy, securities fraud and wire fraud against Martin, Smith, White and Tezak. The SEC has filed securities fraud charges against those four, as well as McCall, Tull, Ibis Securities, the now-defunct underwriter, Ibis principals Kenneth Martin and George Tamura, and Signal Mortgage Inc., a mortgage broker partly owned by White and two of Terry Martin's companies.
Martin apparently pushed the bond financing after having failed to obtain private financing. Soon after the bonds were issued, the Washington state auditor found the district violated state laws and the bonds were illegally issued because the office park would not be located in the district's jurisdiction.