Engineer takes fall for bond fraud

Published 12:00 pm Wednesday, March 31, 2004

The engineer hired to protect the Holmes Harbor Sewer District through a complicated legal and financial process turned out to be the inside man in a $20 million illegal bond scheme, according to court papers recently released.

Leslie Killingsworth, a longtime civil engineer from Coupeville, pleaded guilty last week in U.S. District Court in Seattle to wire fraud for his role in duping the district into issuing the bonds.

The plea agreement revealed that Killingsworth, 68, had a secret $2 million deal to sell the business he founded, Datum Pacific, to the man who is now accused of fraudulently obtaining the $20 million in municipal bonds.

He and developer Terry Martin had a business relationship that began at least two years before the district issued its illegal bonds. While supposedly working for the best interest of the sewer district, Killingsworth admitted in the plea agreement that he was taking orders from Martin.

Martin, of Mukilteo, was one of four people indicted in August and charged with conspiring to fraudulently acquire the municipal bonds and then sell the bonds under false pretenses to more than 200 investors. Also indicted by the U.S. Attorney’s Office in Seattle were bond broker John White, and attorneys J. David Smith and Edward Tezak.

The federal grand jury did not originally indict Killingsworth. His plea agreement came as a result of a continuing investigation, said Assistant U.S. Attorney Floyd Short. When contacted at his home in Spokane, Killingsworth said he would not comment about the plea.

Martin had proposed building an office complex in Everett and approached the Holmes Harbor Sewer District to issue bonds to finance the water and sewer infrastructure. The district’s board of trustees approved the bonds in October 2000 despite warnings from state auditors that the issuance might be illegal. When the bond issuance was officially declared illegal by an Island County Superior Court judge, it became the second largest municipal bond failure in the history of the state.

White pleaded guilty March 18, admitting that he knew long before the bonds were issued that Martin had decided not to build the office complex. According to White’s plea agreement, Martin confided that he planned to use the $20 million to build the infrastructure and then sell the improved land to make a profit and pay back the bonds.

Killingsworth and his Coupeville engineering firm, Datum Pacific, routinely did work for the sewer district and for Island County. He was hired to serve as district engineer to help shepherd the bond process through its many steps and oversee the progress of Martin’s proposed office complex.

Two years before the bonds were issued and a full year before the idea was first proposed to the district board, Martin and Killingsworth began discussions about the sale of the Datum Pacific to Martin for $2 million. Killingsworth never told the board about his financial relationship with Martin.

Datum Pacific became a subsidiary of the engineering firm Adams & Clark, Inc., of Spokane, in 1991, and Killingsworth became a principal of that firm. Datum Pacific closed its doors 18 months ago and Killingsworth “is no longer doing business,” according to Dan Clark, the lead principal of Adams & Clark.

Clark said Tuesday he had not read the plea agreement and had no comment on anything Killingsworth agreed to in the court papers.

A month after the bonds were issued, Martin and Killingsworth collaborated to submit a pay request to the district for $902,000. According to court papers, Killingsworth used invoices unrelated to the Everett development project, rewriting them to change the dates, the scope of work and payment histories to make them appear legitimate. As part of this pay request, Killingsworth submitted a $441,000 invoice from a contractor and another $277,000 invoice from Martin for work that had never been performed at all.

In the plea agreement, Killingsworth admitted fabricating the pay request in order to provide Martin with sufficient funds to pay his debt to Datum Pacific. The request was faxed to the bond underwriters in California, which resulted in the charge of interstate wire fraud brought by the U.S. Attorney’s Office.

Killingsworth also admitted in the plea agreement that, months before the bonds were issued, he was aware that Martin’s plan application with the City of Everett had been rejected. He withheld that fact from the board even though he was hired specifically to verify such information.

The $902,000 payment request was ultimately rejected by the sewer district board at its December 7, 2000, meeting. The board had recently learned that permits for the project had not been issued and essentially no construction work had been done on the site.

That meeting was a watershed event for the board of directors, said Short, the U.S. Assistant Attorney. The board discovered Killingsworth had misled them and the entire scheme began to unravel, he said.

Killingsworth, allegedly at the direction of Martin, later tried to retrieve the fraudulent invoices, but was refused. Those documents ended up in the hands of federal investigators and became a key piece of evidence leading to the fraud charges.

Like White before him, Killingsworth faces a maximum sentence of five years imprisonment and $250,000 in fines, as well as supervised release and restitution. He will be sentenced after the trial for the other three defendants, scheduled for June 7, is concluded.

In a civil settlement with the sewer district, Killingsworth earlier agreed to pay the district $150,000.

When contacted about his guilty plea Tuesday, Killingsworth refused to comment.