WASHINGTON -- Donaldson, Lufkin & Jenrette Securities Corp. has told a federal court that the lawsuit brought over the Heather Estates black-box housing deal represents a "naked attempt to extract unwarranted tribute from a national securities firm perceived to have deep pockets."
In a recent motion filed with the U.S. District Court for the Central Division of Utah, the securities firm asked that it be dismissed from the suit because the Housing Authority of Clearfield, Utah, and Residential Mortgage Inc. have no real claims against it.
The firm said the suit lumps it together with Matthews & Wright Inc. and other defendants in the Healther Estates case in an effort to show "guilt by alleged association."
The housing authority and Residential Mortgage, which owned the land where the project was to have been built, filed the lawsuit eight months ago, charging participants in the $6.8 million Heather Estates black-box housing deal with securities and tax law violations as well as fraud, breach of fiduciary duty, and racketeering.
But lawyers for Donaldson Lufkin and Matthews & Wright, Arthur A. Goldberg, a former Matthews & Wright executive vice president, and Ira A. McCown, a former Donaldson Lufkin senior vice president, all filed motions to dismiss the charges last month. The motions follow a recent refusal by a panel of federal judges to transfer the Heather Estates lawsuit to a U.S. district court in Pennsylvania for consolidation with other suits pending against Matthews & Wright, most of which have been put on hold.
Lawyers for the Clearfield authority and Residential Mortgage had hoped the judges' decision would lead to a settlement of the Heather Estates lawsuit. They have been seeking money from parties to the deal to settle tax law violations and to prevent the Internal Revenue Service from following through with its threat to tax the bond-holders.
The IRS earlier this year charged that the bond issue, which was closed without cash in 1985 and resold in 1986, was not tax-exempt because there was never any reasonable expectations that the proceeds would be used for housing. But the IRS said it would not tax bondholders if the authority paid the federal government $638,064.
But Donaldson Lufkin, in its motion for dismissal, said the suit's claims against it are completely unwarranted because it did not underwrite, receive, or sell any of the Heather Estates bonds and "did not earn one cent in connection with the transaction."
The firm said Harold R. Stephens, the lawyer for the Clearfield housing authority and Residential Mortgage, acknowledged under oath in a deposition taken before the complaint was filed that Matthews & Wright was the underwriter of the bonds and that Donaldson Lufkin's name did not appear on any of the bond documents. Yet the complaint that Mr. Stephens filed earlier this year said that the official bond transcript showed that Donaldson Lufkin was a "co-underwriter" of the bonds.
In its motion, Donaldson Lufkin said Mr. Stephens "knew at the time he signed and filed the initial complaint in this action that the claims alleged against DLJ were frivolous." The firm asked the court to sanction Mr. Stephens and to make him pay court costs.
Mr. Stephens could not be reached for comment. But Lynn Jenkins, chief executive officer at Residential Mortgage, said Donaldson Lufkin's name did appear on the bond documents and that Mr. Stephens was not aware of this at the time that he made statements suggesting otherwise.
But federal officials who have investigated black-box bond deals have said Mr. McCown, while working at Donaldson Lufkin, had proposed the firm underwrite more than a dozen of the black-box deals in the mid-1980s. Other officials at the firm were concerned about Mr. McCown's proposals for closing the deals and would not let him proceeds. Mr. McCown, the federal officials have said, then took the deals to Matthews & Wright, which underwrote and closed them.
Donaldson Lufkin also said Mr. Stephens has previously stated in court papers that Residential Mortgage had nothing to do with the Healther Estates deal because it was suspended and then involuntarily dissolved by the State of Utah Corporation Commission in 1985 and 1986. Mr. Stephens made the assertion in court papers he filed on behalf of Residential Mortgage, which was sued in 1988 by Heather Estates Inc., the proposed developer of the housing project, the firm said. It said Mr. Jenkins "works for Mr. Stephens as an 'investigator.'"
Donaldson Lufkin said it was sued by Mr. Stephens in another, similar suit over a black-box deal -- Bono Development Inc. v. Tetrick -- but that the suit was dismissed by a federal judge in Utah. The firm urged that the Heather Estates suit be dismissed in a similar manner.