Oklahoma taxpayers sue bond firms to recover damages in arbitrage program.

DALLAS -- Following years of controversy, two Oklahoma City school district taxpayers yesterday filed a lawsuit against the bond underwriter, counsel, and others that profited from a 1990-91 school cash management program that they allege was unlawful and fraudulent.

Filed in Oklahoma County District Court, the lawsuit seeks to collect triple damages on an unspecified amount of profits collected by private businesses involved in the 1990-91 cash management program that has drawn a demand for arbitrage rebate from the Internal Revenue Services. Millions of dollars could be at stake.

The plaintiffs are two Oklahoma City attorneys, Robert H. Anderson, and R.P. "Bob" Moore. Named as defendants are: Stifel, Nicolaus & Co., the bond underwriter; Sanwa Bank Ltd., the letter of credit provider; Hawkins, Delafield & Wood, the tax attorneys; Fagin, Brown, Bush, Tinney & Kiser, the bond counsel; and Hilborne & Weidman, the underwriter's attorney. The Oklahoma City School District also is named as a defendant.

In the suit, the taxpayers claim the agreement was unlawful and fraudulent because "the district could not and did not experience the cash-flow shortages, which it certified that it expected to experience."

The suit also said: "The program was for the benefit of its designers and participants, and not the school districts, which received but a small portion of the considerable profits from the program."

Under the 1990-91 cash-management program, the Oklahoma City School District borrowed $30 million in tax-exempt tax and revenue anticipation notes and collected $252,095 in arbitrage profits despite no budget deficit. The district was one of approximately 200 Oklahoma school districts that participated in the program, which totaled $395 million in 1990-91.

Since then, the IRS has investigated about six school districts for allegedly exaggerating their budget deficits and violating IRS arbitrage regulations. Under tax law, the districts, are allowed to issue tax-exempt notes to cover temporary cash shortages, but are banned from issuing tax-exempt bonds based on exaggerated budget deficits to earn arbitrage profits.

According to IRS calculations, the Oklahoma City School District could owe more than $1 million in arbitrage profits, penalties, and interest for the 1990-91 program alone. Other cash management programs in the two following years also could be questioned.

Oklahoma City taxpayers maintain the district should not be liable for that money. Rather, the underwriter, attorneys, and others who gave advice to the school districts based on "erroneous assumption," should pay. The suit said: "The district was led to believe this program was a free lunch."

However, the tax attorney, Hawkins, Delafield & Wood, defended its role. "The papers to comply with the tax rules were correctly prepared," said Robert C. Rosenberg, a partner at the New York City tax firm.

Other defendants either had no comment, could not be reached for comment, or said they wanted to review the suit before making a comment. In the past, Stifel has maintained that such a suit had no basis in fact or law and has claimed it is a matter between the school district and the IRS if figures were miscalculated by the schools.

A spokesman for the Oklahoma City School District said the district is continuing to negotiate with the IRS on a rebate settlement and is continuing to review the taxpayer claim.

About a month ago, a group of 10 taxpayers and a team of several lawyer headed by a former U.S. attorney for the western district of Oklahoma, Larry Patton, threatened to sue those who profited from the deal unless the school district met an Oct. 4 deadline to do the same.

The district did not. Instead, it turned to an accountant paid by Stifel, the Memphis office Ernst & Young, to calculate its rebate. It also considered proposals to deal with the IRS in an executive session on Monday, but deferred action on the matter.

Earlier, the Tulsa school district made a deal to pay the IRS $500,000 to settle a bill that could have exceeded $3.5 million in rebates, penalties, and interest for its involvement in three cash management programs. General fund money would be used to pay the settlement.

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