FRANKFURT, Ky. -- Testifying yesterday in the federal extortion trial of the husband of former Kentucky Gov. Martha Layne Collins, the president of Donaldson, Lufkin & Jenrette Securities Corp. said that his firm partially reimbursed employees who had made investments in horse partnerships sold by Bill Collins.

Bill Collins, the governor's husband, was charged in July 1992 with one count of extortion for allegedly forcing Donaldson Lufkin and Cranston Securities to ante up more than $1 million in campaign contributions so the firms could win underwriting contracts. Collins is also charged with breaking federal tax laws. No other persons have been charged.

John Chalsty, the Donaldson executive, said that the firm forgave about $500,000 in loans to employees who had invested in Partnership No. 2, which was sold by Collins investments in late 1984.

Chalsty said this decision came after the firm backed away from underwriting a portion of the partnerships sold by Collins Investments following a commitment to participate in about $1 million of the investments.

Collins Investments, which was managed by former-Gov. Collin's husband, Bill, and two others. was formed shortly after Martha Layne Collins became Kentucky governor in December 1983.

"We were concerned that we did not have the wherewithal to effectively market" the partnerships. Chalsty said. "But we still felt that we had undertaken a commitment to an important person in an important state. "

According to records of the Collins Investments, six employees at Donaldson invested a total of $1.2 million in Collins Investments horse partnerships -- 950,000 in Partnership No. 2 in October 1984, and 250,000 in Partnership No. 3 in Oct. 1985.

During 1984 and 1985, Donaldson served as lead-manager in three Kentucky bond underwritings totaling $500 million: a Kentucky Turnpike Authority financing sold in April 1984, a 100 million Kentucky Housing Corp. issue sold in October 1984 and another Housing Corp. issue sold in November 1985.

"I see nothing at all wrong here -- [the loan forgiveness] was similar to an employee profit-sharing plan," Chalsty said in an interview yesterday. He said he did not consider the arrangement to be improper.

Chalsty also defended his firm's decision to contribute at least $25,000 to Martha Layne Collin's election campaign and $15,000 to her inauguration celebration. The contributions were made to "establish our visibility" in Kentucky, Chalsty said. "There was absolutely no expectation that we would get business in return."

According to a Donaldson memo from October 1983 introduced by the prosecution yesterday, Joseph Harcum, manager of the firm's public finance department, wrote Chalsty that Lynn Luallen, former executive director of the Kentucky Housing Corp. had "approached" the firm asking for 25,000 in campaign contributions for Martha Layne Collin's campaign.

The prosecutor also noted that the contribution to the inaugural in 1984 followed a memo from William Johnston, a Donaldson senior vice president. The memo said, "In an effort to continue our business relationship in the State of Kentucky I am requesting we make" the contribution.

On Monday, William Roberts, former president of Cranston Securities, testified that he was not forced to make an investment in the horse partnerships in return for bond underwriting contracts in Kentucky. Roberts said he invested $100,000 in the partnerships. Cranston's chairman, Robert Kanuth, invested $350,000, according to court documents.

During Martha Layne Collins' administration, Cranston Securities was lead manager for all five Kentucky Turnpike Authority financings, sold since 1985, for a total of $1.2 billion of bonds. Like Donaldson, Cranston Securities had not been senior manager of Kentucky debt during the Collins administration.

In testimony presented early last week, former finance director Lester Thompson said he directed Luallen to award a $100 million Kentucky Housing Corp. issue to Donaldson after Bill Collins told him in mid-1984 that several Donaldson officials would invest in the horse partnerships if they were named to underwrite the bond issue.

Thompson also testified last week that Luallen handled details of Donaldson's payment of $35,000 for a grand piano presented as a Christmas gift to Martha Layne Collins in December 1984.

Until this week the government had produced little evidence that it could point to as supporting Thompson's testimony of early last week alleging that Bill Collins orchestrated an extortion plot focused on the bond underwriters.

Last Friday, James Ramsey, a former state debt manager, undercut Thompson's claim that in February 1985 he told Ramsey to favor Cranston in a competition for a $310 million Turnpike Authority bond contract sold in June 1985.

In his Aug. 23 testimony, Thompson had said that, at a meeting in a Lexington restaurant that included Bill Collins, he gave Ramsey a piece of paper specifying that Cranston be awarded the lead spot on the deal.

Thompson also had said he detailed in the note what fees should be given to other participants in the financing.

In his testimony Friday, Ramsey denied that Thompson made the requests about the awarding of the deal.

The former debt manager did, however, acknowledge that Bill Collins was present at the meeting.

"I don't remember anything about a bond issue," he said. "I certainly don't ever remember receiving any written directive like that," Ramsey also testified.

Ramsey served between 1981 and 1992 as executive director for the Finance Cabinet's Office of Debt Management.

In a statement read to reporters after Friday's testimony, Ramsey said, "I'm outraged and deeply resent anyone's claim that I was a conduit for outside influence. "

As finance secretary between the end of 1983 and December 1984, Thompson supervised Ramsey. Gordon Duke then became finance secretary.

Ramsey said that he was not aware of any attempt by Bill Collins to influence underwriter selection.

But while Ramsey's testimony did not implicate Bill Collins, it included some details on the state's underwriter selection process during the administration of Gov. Collins.

Ramsey said he was "shocked" when Cranston was, in fact, chosen in May 1985 to be lead manager of the $310 million state turnpike authority deal.

Ramsey said his reservations focused on what he described as the firm's "lack of experience and retail capacity."

According to an April 1985 memo from Ramsey that the prosecution introduced as evidence in the trial, the debt management office's four-member underwriter selection committee recommended Morgan Stanley, Merrill Lynch, and Dean Witter as finalists for the lead-manager slot on the deal.

Ramsey said that Gordon Duke, who replaced Thompson as finance secretary, added Cranston, Donaldson, and Goldman Sachs to the list of finalists chosen by the committee, dropping Dean Witter.

In a letter to a Morgan Stanley & Co. executive dated May 8, 1985, introduced by prosecutor John Compton, Ramsey credited the firm with the idea for the refunding.

"We appreciated the advice of the Morgan Stanley people on the pricing and bond structure, but more importantly, as you know, the finance plan developed by those at Morgan Stanley turned out to be the plan that provided the optimal solution to a problem with many constraints," Ramsey wrote to Richard Harris, then a principal at Morgan Stanley.

Cranston went on to run the books for a total of five deals totaling $1.2 billion, according to state records introduced at the trial.

Ramsey also addressed the selection of Donaldson as lead manager on a $300 million Kentucky Turnpike Authority issue in April 1984,

Ramsey told the court: "I wanted to give the secretary [Thompson] the benefit of the doubt, but part of me believed we were going through the process to justify [Donaldson's] selection."

In addition, the government also obtained testimony last week from employees of a firm outside the bond industry who testified that they contributed to Gov. Collins' campaign and invested in the horse partnerships in the expectation that this would help them win state contracts.

"We call it getting on the ~Good Guys list,'" said J.M. Crawford, president of J.M. Crawford & Associates. Crawford's company is an architectural firm specializing in road and bridge design.

"If we did not [contribute the money], we felt they would take great offense and we would not get any state work at all," Crawford's partner, Herman Hodskins, testified.

According to information provided by the firm and presented at the trial, Crawford & Associates received more than $2 million in state contracts during the Collins administration, after earning negligible income from the state in the years just before 1983 and after 1987.

The business came after individuals at the firm contributed $12,500 to Collins campaign and borrowed $80,000 for horse partnerships.

In his testimony last week, Thompson claimed that architects and engineers who received state contracts in Kentucky at the time kicked back to the state's Democratic Party between 3% and 5% of their pay on this work.

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