WASHINGTON -- Lance Wilson, a former vice president at PaineWebber Inc., goes on trial here today in a case that spotlights bond dealers' common practice of providing commitment letters to underwrite the bond financing for federal housing projects.
The independent prosecutor in the case, Arlin Adams, is charging that Mr. Wilson, in writing three such commitment letters for projects in Florida and Texas, committed fraud against the government because he knew the promised financings most likely would never be carried out.
Mr. Wilson faces a possible jail sentence if Mr. Adams proves that point before the U.S. District Court for the District of Columbia in a trial that is expected to last six weeks.
But bond professionals say that, based on the evidence offered by the government thus far, Mr. Wilson's commitment letters may not have been that different from the usual practice among bond dealers. Before Mr. Wilson was indicted in January, they say few would have regarded the practice as illegal.
The 30-count indictment, which was the second to come out of Mr. Adams' two-year long investigation into the so-called HUD scandal at the Reagan-era Housing and Urban Development Department, levels first-ever charges that Mr. Wilson's letters were part of a conspiracy to defraud the department.
In fact, Mr. Wilson's principal role in the alleged conspiracy was to write the commitment letters on PaineWebber stationery. The letters at issue promised to underwrite taxable municipal bonds for three projects being developed by an alleged co-conspirator and business partner, Leonard Briscoe.
All but one of the counts against Mr. Wilson involve the commitment letters. The remaining count, a bribery charge, alleges that Mr. Wilson provided illegal gratuities to former HUD Deputy Assistant Secretary DuBois Gilliam, who later approved the grants for Mr. Briscoe's projects.
The commitment letters were needed to obtain the department's Urban Development Action Grants for the projects. HUD regulations specify that developers must obtain firm private financing commitments equal to two and a half times the size of a proposed grant before they apply for the grant.
For example, a January 1987 commitment letter that Mr. Wilson wrote on behalf of Mr. Briscoe's Palm Glade apartments complex in Palm Beach County, Fla., stated that PaineWebber would underwrite $7.7 million of taxable bonds for the project. It also said PaineWebber would issue an offering memorandum within 90 days of getting the grant.
"All necessary due diligence with respect to the development has been conducted" to determine that the project is in compliance with state and federal laws, Mr. Wilson wrote. In addition, Paine-Webber had concluded that the project would not need credit enhancement, he said.
In April 1987, the Palm Glade project received a grant. But it never actually was completed, according to the indictment, and PaineWebber never underwrote any bonds for it.
The indictment charges that Mr. Wilson's claim that the company had performed the necessary due diligence on the project was a false statement and a fraud. Mr. Wilson and Mr. Briscoe actually had agreed secretly to submit the letter "without regard to the financial viability" of the project, it alleges.
In fact, the Palm Glade project "did not meet HUD requirements," and Mr. Wilson wrote the letter simply to enable the project to qualify for the grant while giving Mr. Briscoe additional time to search for another source of private financing, the indictment says.
Mr. Wilson so far has not publicly responded to the charges against him. He claimed his constitutional Fifth Amendment right to remain silent when similar allegations were aired in testimony two years ago before the House Government Operations Committee's subcommittee on employment and housing.
Mr. Wilson's lead attorney in the court case, Theodore V. Wells of Lowenstein, Sandler, Kohl, Fisher & Boylan, did not return phone calls. Another attorney of Mr. Wilson, Martha Rogers of Cadwalader, Wickersham & Taft, said Mr. Wells will preview Mr. Wilson's defense tomorrow in his opening statements at the trial.
Bond professionals who agreed to anonymously discuss the practice of providing financial commitment letters said that while there may be some unusual circumstances in Mr. Wilson's case, for the most part his commitment letters do not appear that out of the ordinary.
A Florida dealer said familiar with the Palm Glade deal said such letters usually are "a little bogus" for a number of reasons.
For one thing, it can take years to obtain a federal grant. With many eligible projects competing for scarce federal funds, a project can sit on the department's funding list for years before being approved, he said.
Given the uncertainty of federal funding, few investment banking firms would commit themselves irrevocably several years ahead of time to an as-yet unapproved project, he said. In addition, the final terms of any bond financing cannot be determined that far ahead, he said.
Beyond that, the wording of a typical commitment letter is "so broad and general" that most would not view it as a legally binding commitment, he said.
Most of the letters condition promised underwritings, for example, on the approval of grants for the projects. Still others require the developers to obtain credit enhancement before the underwriter will proceed with the issues, he said.
Another letter at issue in Mr. Wilson's case illustrates that point. Written in November 1986, it committed PaineWebber to underwrite $80 million of taxable bonds for Mr. Briscoe's Overton Ridge housing project in Fort Worth, Tex., specifying that the financing was "subject to the award" of a grant, PaineWebber officials said in testimony before the Housing subcommittee.
The Overton Ridge project never received federal funding, according to the indictment, and PaineWebber therefore never actually underwrote any bonds.
An attorney familiar with the Overton Ridge commitment letter said that like other such letters, it could not be viewed as legally binding because it was highly conditional and the exact terms of the underwriting were never stated.
One irregularity in the letter Mr. Wilson wrote for the Palm Glade project, according to the Florida dealer, was its statement that the project had been judged creditworthy and the financing would not need enhancement.
As it turned out, the project's financing proved to be a weak credit that required insurance. It was located in a relatively poor part of affluent Palm Beach county where banks for years had been reluctant to provide backing for bonds, the dealer said.
Mr. Briscoe was unable to obtain insurance after trying without success for a year and a half, the dealer said. He finally placed an uninsured, $9 million issue for the project privately in March 1989 through the Boson firm, Homans, McGraw, Trull, Valeo, & Co.