Developer to Fight Order to Stop Marketing For-Profit Prisons to Counties in Missouri

DALLAS - The Missouri Securities Commission last week ordered a developer to stop marketing for-profit prisons to counties, alleging that he failed to properly register with regulators and misrepresented his record on similar projects.

But Joe Vaughn, president of Indiana-based Diversified Municipal Services Inc., said the action is the first he has faced in three decades of working in 26 states. He plans to fight the cease and desist order, saying he has done nothing wrong and is not legally required to register in the state.

"We are going to cease and desist while we work it out," Mr. Vaughn said. "It came as a surprise to me because we are not advising anyone to invest in anything."

Mr. Vaughn has hired the Kansas City law firm of Stinson, Mag & Fizzell to represent him. A lawyer from the firm said a formal appeal of the order was filed Friday.

But Steve Yttri, a lawyer for the commission who filed the order last week, said the agency believes Mr. Vaughn has been offering investement advisory services to Missouri counties from April through August 1991.

"It requires registration, just as selling a security does," Mr. Yttri said.

But Mr. Vaughn said he is not required to register because he was not acting as a financial adviser to Missouri counties when he proposed that they own and operate for-profit jails. He described his role as a developer who is offering counties an opportunity to sign a real estate lease for the development of a prison they would operate.

The order against Mr. Vaughn and his company also alleges that "respondents misrepresented or omitted to state material facts in connection with the offer and sale of investment advisory services in Missouri."

Specifically, the order alleges misrepresentations of the liability counties would have in connection with the issuance of certificates of participation to investors to finance the prison; the financial condition of earlier prison projects; and his experience in constructing and developing such projects.

Mr. Vaughn denied the allegations.

"We sell our lease to an investor. There's no issuance of COPs by the county," he said. "The liability for the lease is limited to the revenues of the project."

He said his proposals to several counties in Missouri and other Mid-western states are not like private, for-profit jails built in Texas that were financed with bonds issued by nonprofit corporations. So far, five of six such projects in Texas are without inmates.

Instead, Mr. Vaughn said, his proposal calls for the local government to own and operate the prison for a profit.

But many investment bankers have criticized projections by Mr. Vaughn that counties could make millions of dollars over the life of the projects by leasing beds to states and others whose jails and prisons are crowded beyond legal limits.

Mr. Vaughn has been involved with projects in Texas, including the now-defaulted Zavala County Detenetion Center.

As for charges that he misrepresented the condition of his past projects and his own record, Mr. Vaughn said they are not true. Jay Terry, a partner in the Dallas office of Leonard, Marsh, Hurt, Terry & Blinn, said that in his role as special tax counsel on two other Vaughn deals, he never saw a problem with full disclosure of past projects.

"Any past work of Joe's has always been disclosed," Mr. Terry said. "I'm a little surprised the securities people in Missouri are in this."

While the order effectively bars Mr. Vaughn or his representatives from doing business in Missouri, he concedes there were few takers for his proposal for now.

"I'm not so sure we were going to do anything in Missouri right now anyway, but maybe we will in a few years," he said.

He blames local politics in Worth County, Mo. - where some opposed a for-profit prison - with prompting the state inquiry which The bond proceeds would be used to defease about the same amount of outstanding bonds from an issue sold in 1986 to finance the construction of the John P. Cohalan Court Complex, which is slated to open in July 1992.

Budget relief will be partially achieved by freeing up bond reserves for the county, Mr. Devane said.

Then, 31 days after the refunding issue is sold, the authority would sell about $25 million of new money premium bonds to generate $31 million of bond sale proceeds. A portion of the proceeds from this issue would be used to reimburse the county $14 million in capitalized interest payments it made during 1989, 1990, and 1991 on the court complex bonds.

Although the county has been hit with weak sales tax collections and lead to the cease and desist order.

Mr. Vaughn plans to appeal the order to Missouri Securities Commissioner John Perkins, who declined to comment since he will hear the challenge. If unsuccessful there, Mr. Vaughn could challenge the order in Cole County, Missouri Circuit Court.

"I think they knee-jerked on this. They never even saw documents before they decided this," he said. "It's one of those things I find a gross embarrasment, but you have to fight it."

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