Sewer district settles; conspiracy revealed

The Holmes Harbor Sewer District agreed to pay $400,000 in a class-action settlement that netted buyers of ill-fated bonds $1.6 million from various players in an illegal bond scheme. The settlement was approved Monday by Island County Superior Court Judge Alan Hancock.

The agreement appears to be the last in a long series of settlements in which the sewer district has sued and been sued over the bond issuance three-plus years ago. However, the district remains potentially on the hook in the biggest portion of the class action suit — which is still unresolved — involving three big-name bond sellers who bought the bonds on behalf of their clients. Two of the bond sellers, Prudential Securities and U.S. Trust, have filed cross-claims against the district.

Monday’s settlement, however, goes a long way toward insulating the district from future payouts, said Stan Walker, president of the district’s board of commissioners. “The big specter of a huge award against the district has been resolved with this settlement,” Walker said.

Yet, he warned it’s not yet time to commit the whole matter to history.

“It’s kind of like we’ve been crawling through the swamp the last couple of years,” Walker said. “We made it to the beach, but we’re not clean and dry yet.”

The district began crawling through that swamp in October 2000 when it issued $20 million in municipal bonds to finance infrastructure for an office complex in Everett, despite repeated warnings from the state auditor’s office and its own attorney that issuing bonds for a project outside its district would be illegal. The bonds were quickly sold, but the office complex never materialized. Judge Hancock, following the opinions of the state auditor and the state attorney general, declared the bonds illegal, and therefore worthless, in February 2003.

The U.S. Attorney’s Office has since indicted five people involved with the phantom development, including developer Terry Martin, for conspiracy to commit fraud. Three of those people, bond broker John White, attorney J. David Smith, and the district’s contracted engineer, Les Killingsworth, have all pleaded guilty, and described a widespread effort to falsify documents and make false claims in order to convince the district to issue the bonds.

In the Monday’s settlement, the plaintiffs also settled with the district’s attorney, Mike McCall, for $700,000, and Martin’s attorney Charles Tull for $500,000. In addition, the district agreed to sign over any interest it had in lands purchased, using bond money, for the 40-acre development project. The settlement also released four of the five original board members who were specifically named in the suit. Bill Spalding, the board’s president at the time of the bond sale, was not a signatory to the agreement.

Bob Trimble, who has a weekend home near Holmes Harbor, is the largest single investor among about 400 people who purchased the bonds. Although he said the current sewer district board has been exemplary in dealing with the mess, he feels the original board members who voted to issue the bonds should be accountable for failing to heed the warnings.

He pointed out the board ignored advice from a state auditor, their own attorney, and other experts who told the board the district had no legal authority to issue bonds for a project in Everett. The emerging evidence of an alleged conspiracy among the professionals behind the development project doesn’t excuse the board’s actions, he said.

“Factually, it’s true,” he said. “They (the developers) did conspire to try to dupe the district. But the commissioners for the district closed their eyes to things they should have been aware of.”

The remaining battle for Trimble and others in the class action suit is with Prudential, U.S. Trust, and Wedbush Securities. Trimble accuses those firms of not doing due diligence in investigating the bonds before purchasing them on behalf of clients. “They took the easy way to get a full commission and did none of the work to protect their clients,” he said. “And since, have done nothing to put this right.”

With this settlement, the sewer district is still in the black as far as its litigation funds are concerned, said Walker. The fund, accumulated by suing and settling with attorneys and engineer Killingsworth for malpractice, has less than $100,000 remaining. He said he only hopes the final legalities involving the large bond brokers will be settled before the fund is depleted by lawyer’s fees.

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