DALLAS -- Some of the defendants in one of the largest bond fraud and conspiracy cases ever may seek a new trial or ask a federal judge to reduce the amount of damages awarded to the plaintiffs.
In the case against a Texas jail developer and others, a federal district court jury in Houston last month awarded up to $79 million in actual damages and $5 million in punitive damages to nine mutual funds, an individual investor, and six county jail financing corporations.
"I suspect I will be filing a motion requesting a new trial," said Carl Parker, a Texas attorney who represents N-Group Securities, developer of six forprofit jails.
Parker declined to discuss his plans further until motions for a final judgment in the case are made in several weeks. But other sources said some defendants' attorneys plan to seek a reduction in the amount of damages in the federal district court in Houston.
"We are keeping all of our options open," said a spokesman for Chicago-based Keck, Mahin & Cate, the law firm accused of conspiring with the jail developer and others. "We don't feel anyone has won anything yet. It is the sixth inning."
The spokesman said the federal district court judge, Simeon T. Lake, has indicated that he will take up to several months to enter a final judgment in the case after considering motions from the plaintiffs and defendants.
In the verdict last month, the jury found that Keck, Mahin & Cate conspired with the Houston jail contractor, H.A. Lott Inc., and N-Group Securities to fraudulently market more than $70 million in revenue bonds to build six private jails in rural Texas.
Following a six-week trial in Houston, they found the defendants violated both state and federal securities laws and conspired to commit fraud by not disclosing material facts to investors. That included the disclosure that the jails were not built to meet state standards and could not be used by Texas at that time.
"The jury found the bonds were worthless when they were issued," said Robin Gibbs, an attorney for Gibbs & Brun in Houston, which is representing a plaintiff, APEX Municipal Fund. "It is certainly one of the biggest security fraud verdicts ever in the bond industry, if not the biggest."
Gibbs said his office is now preparing a proposed form of judgment, to be filed in federal district court later this month. The proposed judgment could take several forms, depending on how damages are calculated and how much credit is given to bondholders for the state's eventual purchase of the jails, he said.
Under one scenario, the actual damages for the sale of the bonds could be $68 million, and under another, the figure could be $34 million. The difference is the amount that the state of Texas paid when it bought the jails in 1992 at substantial losses to the bondholders.
In addition to actual damages, prejudgment interest for two to five years would be assessed at an approximately 10% rate. Add attorney's fees and punitive damages, and it stacks up to a large verdict, lawyers said.
"Under any analysis, it is going to be at least $60 million," said Ken Wynne, counsel for T. Rowe Price, one of the plaintiffs. "That is the conservative view, and it could be substantially higher."
In addition to T. Rowe Price Tax-Free High-Yield Fund and APEX Municipal Fund, other plaintiffs are: Merrill Lynch High Income Municipal Bond Fund Inc., Franklin High Yield Tax-Free Income Fund, Stein Roe Municipal Trust, Allstate Municipal Income Opportunities Trusts 1-3, Municipal High Income Fund, and the sole individual investor, Roy G. Anderson.
Some money also would go the six jail financing corporations in Swisher, San Saba, LaSalle, Falls, Pecos and Angelina.
However, the eventual awarding and amount of damages also will be contingent on any further settlements in the case. David Peden, Houston attorney for H.A. Lott, said the judge has requested that the plaintiffs settle with the Houston jail contractor on $4.8 million in damages. The jury found that the subcontracts between H.A. Lott and N-Group Securities violated the Texas Deceptive Trade Practices Act, he said.
Meantime, he said another aspect of the jury finding was positive for H.A. Lott because the jury found the building performed its contract and that probably would prompt a $48 million lawsuit filed by the six private jail financing corporations against Aetna Casualty to be withdrawn. Aetna had guaranteed Lott's performance of the construction contract, Peden said.
When completed, the settlements and the jury verdicts will culminate a long-standing controversy over the private jail bonds that involved many power brokers in the state who worked with officials in six rural counties to sell bonds.
In the deals, the underwriter, Drexel Burnham Lambert, and its counsel, former Texas Gov. Mark White, an attorney in the Houston office of Keck, Mahin & Cate, worked with N-Group Securities and its principals, Patrick and Michael Graham, to market the revenue bonds.
However, evidence indicated that some defendants failed to tell officials of the six Texas counties that the jails could not be leased by the state because they did not meet requirements established by a federal court for maximum-security facilities, and the state would not pay rent to private operators.
Gibbs said testimony in the case indicated that former Gov. White promoted the original business transaction.
The Keck spokesman said: "We deny any conspiracy or wrongdoing on our part."
Initially, another law firm, Hutchison Boyle Brooks & Fisher, which acted as bond counsel for the six counties, was named in the suit. But the Dallas law firm settled late last year for $655,386, and a federal district court entered an order of dismissal in December, containing findings that Hutchison Boyle and attorneys Ray Hutchison and David Petruska did not engage in wrongful conduct.
Ray Hutchison said the firm settled for approximately the amount of its fees and would have refused to participate had attorneys known facts that were later revealed in the litigation.
"Many persons -- including the plaintiffs, our firm, very reputable investment bankers, and others -- were victims in this matter," he said.
Hutchison also said: "We have had no involvement in the case after the settlement and the order of dismissal and were not involved in the trial."
