Articles

• The City's case, from this side of the Looking Glass
• A more complete history of Steve Eugster's, Cherie Rodgers', and the City's challenges to the City's loan obligation
• Real and imagined fraud, and why the City's fraud claim against the Cowles was dismissed
• Value of Settlement Analysis

Real and imagined fraud, and why the City's fraud claim against the Cowles was dismissed

Cherie Rodgers occasionally accuses the City of voluntarily dismissing its fraud claim against the Cowles, but it never did.

Under Mayor Powers, we did drop a dubious "conspiracy" claim, which accused City officials of burying information about work earlier performed by Walker Parking for the Cowles and wrongfully using an investment value appraisal methodology in order to divert public funds to private purposes. But the evidence did not support the claim about burying information and there was nothing hidden about the City Council's intent to lend financial support for a garage purchase at more than fair market value. It was a part of the record before the Washington Supreme Court in 1997 that some subsidization was intended through use of an investment value appraisal. The Supreme Court nonetheless found that there was no unconstitutional gift or extension of credit. See CLEAN v. City of Spokane, 133 Wn.2d 455, 467-70, 947 P.2d 1169 (1997).

The strategy behind the troubled claim was also hard to see. As a retired Supreme Court justice later told the Pacific Northwest Inlander, for the City to claim that its own Council members participated in a fraud would, from the perspective of other parties, be "like a gift coming down from the heavens." It's hard to see why the bond plaintiffs would have gone to the trouble of suing anyone else.

But the City did pursue claims for fraud against the Cowles. They were dismissed, over the City's objection, for two reasons.

A claim for common law fraud requires proof of nine elements, by clear, cogent and convincing evidence. In the City's case, it required proof that (1) the Cowles represented an existing fact (as distinguished from their opinions or projections); (2) its materiality; (3) its falsity; (4) the Cowles' knowledge of its falsity or ignorance of its truth; (5) the Cowles' intent that it should be acted on by the City; (6) the City's ignorance of its falsity; (7) the City's reliance on the truth of the representation; (8) the right of the City to rely upon it; and (9) resulting damage.

Given all of these elements and the heightened burden of proof, a fraud claim is a hard claim on which to recover. An important point missed by Camas when it chastised the U.S. Attorney several months ago for failing to use evidence compiled by the bond plaintiffs to bring criminal prosecutions is that civil claims for misleading disclosure are colloquially called "securities fraud" even when a plaintiff doesn't need to prove true fraud at all. By the time of the April 2004 trial the bond plaintiffs had put together an impressive case, but one of the reasons it was so strong is that --- with respect to most defendants --- the plaintiffs didn't have to prove anything approaching criminal wrongdoing on the part of the defendants. Indeed, with respect to most defendants, their claims for rescission under the state securities act didn't require them to prove even negligence. Perhaps prosecutors to whom the matter has been referred by the U.S. Attorney will conclude that there is evidence of criminally-culpable conduct in connection with the defective bond disclosure. But it would be a mistake to infer from the City's conclusion that the bond plaintiffs had a strong civil case, that a criminal case can and will be made.

Returning to the City's fraud claim against the Cowles: as discussed in "The City's case, from this side of the Looking Glass," many risks and problems with the garage financing were unquestionably known to the City and to the other financing participants. No fraud claim existed against the Cowles with respect to those matters, although a contribution claim did.

But we did contend that the City could establish fraud with respect to critical information that the Cowles knew and withheld about the unwillingness of AMC Theaters, Nordstrom and other retail tenants to pay toward parking validation and about lower revenue projections Walker privately prepared for the developer, using more realistic parking rates than it relied upon in its feasibility analysis for the City. The potential importance of a generous parking validation program had been highlighted by the Coopers & Lybrand report, but the Cowles downplayed the problem and assured City Council members that there were "plenty of ways" to solve any validation problem. Yet City evidence showed that they alone knew prior to the sale of the bonds that AMC wanted and expected parking that was free to it and its patrons; Nordstrom thought that Walker's assumed parking rate was too high; and Nordstrom and a number of other tenants and prospective tenants did not want to support parking costs through validation. Contrary to what the City was being told by the Cowles, the "validation hole" in the Walker projections was a huge problem, with no apparent solution.

As the City prepared its case, however, the Cowles brought their own claim that, whether by design or accident, redounded to affect the City's fraud claim. In June 2001, the Cowles sued Cherie Rodgers, Steve Eugster, Steve Corker and John Talbott for tortiously interfering with their business prospects.

The Cowles' tortious interference claims against City Council members were dismissed, among other reasons, on the basis of the U.S. and Washington constitutions and a line of cases referred to as embodying the Noerr-Pennington doctrine. The state court was persuaded that the Council members' speech enjoyed constitutional protection and could not be the basis for a legal claim.

The Cowles then asserted the same defense against the fraud claim alleged against them by the City. Relying on Noerr-Pennington, the Cowles asked the federal court to dismiss the City's claim for fraud. Just as Rodgers' and Eugster's attacks on the Cowles were protected "speech" or "petitioning" activities, the Cowles argued that their activities advocating for the public-private partnership were protected "speech" and "petitioning" as well.

Their argument came at a time when attorneys for the U.S. Federal Trade Commission were coordinating an effort to clarify problematic case law that was allowing this very defense to be successfully asserted in trade deception cases, involving misrepresentations to public agencies. Despite the City's arguments about why the Council members should enjoy protections not enjoyed by the Cowles, and even providing the federal court with the FTC lawyers' brief to like effect, the Court ruled that the Cowles were entitled to get out of the case prior to any trial on the merits, just as the City Council members had not had to answer on the merits for the tortious interference claims asserted against them.

An alternative basis on which the City's fraud claim was dismissed was testimony from City Council members who had approved the authorizing resolutions and ordinances, and which undercut the City's claim. Unlike portfolio analysts for the bond funds and the analyst for the bond insurer who testified that they expected truthful information in a financial transaction and relied upon the accuracy of representations of their contra-parties (thereby having a right to claim fraud), a majority of the 1997 Council members, represented by their own counsel, denied having the same expectation. As pointed out in the federal court's written decision, members of the 1997 Council deposed in the case testified that they did not rely upon the Cowles.

Although the Cowles denied the City's fraud claim in all respects, the federal court did not hold that the City had not demonstrated misrepresentations or omissions, and the City had presented evidence that important information was withheld. But all the Cowles were required to prove is that the City could not meet any one of the nine required elements. Reliance by the City was one of them.

Camas characterized dismissal of the City's fraud claims against the Cowles as a "devastating loss" of "all-important cross claims." According to whom? The City's remaining contribution claim was a clearer claim, requiring only that it prove that the Cowles participated in the drafting of misleading disclosure to the bondholders, that the City settled the resulting claims, and the percentage of the Cowles' proportionate fault. It is that contribution claim that the Cowles settled later in 2004, for a value that City adversaries placed at $9 to $13 million, and that the federal court found to have a value of $5 million.

I can not close the subject of fraud claims without addressing a proposed "fraud on the court" claim endorsed by Camas, which, it suggests, could have led to the Washington Supreme Court's reopening its 1997 decision in CLEAN. The non-lawyers at Camas suggested as late as 2003 that the City should have moved the Court to re-visit what was by then its six-year-old decision in CLEAN. In order to get around court rules that would make it far too late to call the decision into question, Camas endorsed the notion advanced by then-mayoral candidate Tom Grant that the City and Cowles submissions (by Jim Sloane, Tom Kingen and Duane Swinton) committed a fraud on the Supreme Court.

Although I disagree with some of the legal arguments made by Mr. Swinton et al. in CLEAN, an argument that he and City attorneys committed a fraud on the Washington Supreme Court would be frivolous in the extreme. CLEAN was Steve Eugster's case, and he, too, has expressed no support for the Camas theory. According to the Pacific Northwest Inlander, Eugster called the argument ". . . an absolute non-starter. You're just not going to get [that case] reopened."