In a move that could have sweeping repercussions, a group of Oklahoma taxpayers and their attorney are demanding that the Oklahoma City school district file a multi-million dollar lawsuit against the state's largest bond underwriter and others who profited from an alleged arbitrage scheme.
The group contends that the district's bond underwriter and financial adviser -- Stifel, Nicolaus & Co. -- bond counsel, and others involved in a questionable cash-management program in 1990 and 1991 should pay the Internal Revenue Service bill for appearing to violate federal arbitrage restrictions. It is not the responsibility of the taxpayers, they say. to fork over the money for a bill that could exceed $1 million.
"They have no right to obligate the taxpayers," said Oklahoma City attorney Larry Patton, while Stifel officials fired back that his proposed lawsuit has "no basis in fact or law."
The sparring match began two weeks ago when Patton, who represents the taxpayers group, wrote a letter to the Oklahoma City School District. "The district's participation in the 1990 Cash Management Program was the very kind of participation in an unlawful, illegal or fraudulent contract which is forbidden by" state law, he wrote.
"Those persons and entitles who designed, participated in and shared in the profits and proceeds... have done so at the expense of the taxpayers," he said.
Under state law, Patton said that 10 Oklahoma City school district taxpayers can file their own lawsuit against the underwriters and others who profited from a cash management program if the school district does not respond to their concerns by Monday. The taxpayer lawsuit will be filed if the deadline is not met, he said.
The chief target is Stifel, which has underwritten almost one-quarter of all municipal bonds sold in Oklahoma since 1990, and which has earned millions of dollars from underwriting bonds in the school district cash management programs now being scrutinized by the IRS.
If successful in suing Stifel, taxpayers could use the Oklahoma City School District case as a springboard to other lawsuits in other districts being investigated by the IRS, Patton said. A team of more than six attorneys is making itself available should other districts want to be represented in similar lawsuits.
The threatened suit is one of the latest developments in a controversy that began several years ago. That controversy started when hundreds of school districts and several counties participated in a $524 million borrowing program that generated millions in alleged arbitrage profits in 1990 and 1991.
"This thing is monstrous," said one industry source close to the issue. "So Larry Patton has put the school district and underwriters on notice that he'll sue to protect the taxpayers."
Under the state program, school districts issued tax-exempt tax and revenue anticipation notes, transactions that IRS officials said appear to have violated arbitrage restrictions.
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.
IRS officials have said the deficit projection, in some cases, were not reasonable, and are asking for more than $1 million in rebates, penalties, and interest from the Oklahoma City school district and $1.6 million from the Tuisa school district. At issue in the Oklahoma City district is $30 million borrowed and $252,095 in arbitrage profits made during the 1990-91 cash management program, despite no budget deficit.
The IRS also has written letters to the Lawton, Putnam, and Broken Arrow school districts indicating they are under investigation and is expected to contact more school districts, sources close to the probe said.
The Oklahoma City school district case is one of the furthest along, with Oct. 11 being the target for reaching a settlement with the IRS. However, that date could be changed, said Jon Sellers, a lawyer for the Oklahoma City School District.
Sellers said the school district has not officially responded to the taxpayer demand to sue the Stifel and others, although he said the group was one of several that wanted to provide legal help to the district.
"There are half a dozen people around here lined up for the business," Sellers said, adding that a decision could be made soon.
Meanwhile, St. Louis-based Stifel is offering to provide its own attorneys and accountants to help review the IRS claims for rebates and penalties, and said the suit "has no basis in fact or law."
"If there was a miscalculation by the schools as to the amount of money they would need to borrow, then that issue must be addressed between the school district and the IRS," Stifel executives said in a prepared statement.
Stifel indicated that Patton and his clients were out to grab 50% of the damages under a provision in state law.
Patton responded that the taxpayers are waiving their claims to the proceeds and called Stifel's assertions about the culpability of the school district "stunning." The school district or the bond issuer may be liable under federal tax law, but not state law.
Patton, a former U.S. attorney for the western district in Oklahoma, says state law specifies that persons benefiting from unlawful or fraudulent contracts in school districts can be liable to pay triple the damages.
If the IRS demands more than $1 million from the Oklahoma City school district, Stifel would have to pay more than $3 million in that case alone if the taxpayers won a prospective suit. Millions of dollars more would be involved in other school districts where Stifel was the bond underwriter.
