Class action pursued in Holmes Harbor bond case

Published 6:00 pm Wednesday, November 20, 2002

Calling a $20 million municipal bond sale in 2000 a “grotesque fraud,” an attorney intent on suing the Holmes Harbor Sewer District and several securities firms threw down the first big legal gauntlet this week in Island County Superior Court.

Retained by three bondholders who purchased about 25 percent of the bonds sold by the sewer district, David Hoff spent Thursday morning trying to convince Judge Alan Hancock that the bond sale — which was deemed improper by a state audit last year — is cause for a class-action suit.

The hearing, which will establish class certification if Hancock agrees with Hoff, was one of a series leading to a planned jury trial that will decide who is liable for paying off the bonds. Made essentially worthless by the audit finding, the bonds were sold by the Freeland sewer district to pay for the development of a privately owned office complex in Everett. The audit, released last July, showed the district violated state law by selling bonds for a project outside its borders, and for investing public money in a private venture.

Since then the district, which provides sewer service for about 200 homes, has been mired in legal proceedings leading up to a number of lawsuits currently or soon to be in court.

At Thursday’s hearing, there were some big legal guns aimed at shooting down a possible class action suit. Arguing against Hoff, who represents bondholders Bob and Kathleen Trimble and Ron Crockett, were attorneys representing Prudential Securities, the Bank of New York, several law firms and several former Holmes Harbor Sewer District Commissioners.

The biggest single investor in Holmes Harbor bonds with an initial purchase of $4 million, Bob Trimble said bringing a class action against the bond issuers, sellers and everyone who profited from the sale is the best way to make sure all investors are represented.

Though financially able to bring an action on his own behalf, Trimble said a class action will aid small-scale investors, like his 87-year-old mother-in-law. In her case, the value of her investment in Holmes Harbor bonds does not justify hiring an attorney and pursuing a suit on her own.

“Something like this can be totally beyond her ability to handle it,” he said during a break at Thursday’s hearing.

Trimble’s suit is seeking a refund of the $20 million investors paid for the bonds, plus 8-percent annual interest on the money and attorneys fees. Without other bond holders involved as a class, he can only seek restitution and damages for the $2.9 million in bonds he still owns.

In his argument before Hancock, attorney Hoff said every bond holder deserves his or her money back. At this point, there appears to be little possibility of a return on the investment, since the developer who received the benefit of the bond sale has made no moves to begin construction of his office complex project. The city of Everett has also refused to issue permits for the project.

“There is no question every holder of Holmes Harbor bonds was injured,” Hoff said.

His argument would have had more solidity had one other legal conclusion been at play Thursday. Hancock is expected to rule on Dec. 2 whether or not the bond sale was illegal. That decision is expected to have consequences for the attorneys and former district commissioners who crafted the bond sale.

Hancock will also rule on Dec. 2 whether or not Trimble’s suit warrants class status.

Arguing in defense of his client, Prudential Securities, attorney Kurt Heinlein said Prudential should not be held responsible for the questionable origin of the bonds. He said the company does not guarantee the solidity of the investments it markets.

After the hearing, Hoff said he is confident Judge Hancock will rule in favor of a class action.

“I think that he knows this is a pretty big case,” he said.

The one party that went unrepresented Thursday was the sewer district itself. Stan Walker, president of the district’s board of directors, said Monday that the district, which is already spending about 40 percent of its operating budget on legal fees, cannot afford to send an attorney to every hearing connected with pending lawsuits. The outcome of Thursday’s hearing, he said, will have little effect on the district’s defense effort.

Also established at the hearing was an approximate time frame for a trial. After hearing arguments from the defense, Hancock moved the proposed jury trial date back from May to September or October of 2003. He also agreed with the defense that the court should be prepared for a two-month trial, as opposed to the two to four weeks originally estimated.

Stan Walker said the setback was unfortunate, even though it gives some of the parties named in the suit more time to prepare a defense.

“We want to see this thing resolved,” he said.

To date, the district has spent $207,949 on legal fees.