ATLANTA -- Federal prosecutors in Kentucky Tuesday began outlining their extortion case against the husband of former Gov. Martha Layne Collins, presenting previously undisclosed details about his alleged scheme to extract money from two securities firms in the mid-1980s in exchange for state bond work.

Bill Collins, the former governor's husband, was charged in July 1992 with forcing Donaldson, Lufkin & Jenrette Securities Corp. and Cranston Securities to ante up more than $1 million for campaign contributions and horse partnership investments so the firms could win underwriting contracts. Bill Collins was also charged with breaking federal tax laws forbidding deductions for kickbacks and bribes.

The U.S. District Court for the Eastern District of Kentucky has not leveled any charges against the two investment firms or Martha Layne Collins. She served as governor from 1983 through 1987.

In presenting the prosecution's opening arguments at the start of the trial, being held in Frankfort, assistant U.S. attorney John Compton described a meeting held in February 1984, three months after Collins became governor. The meeting, he said, included the Collinses; Billy Wilcoxson, a campaign fund-raiser: Richard Broadbent 3d, a horse breeder; Melvin Wilson, then public protection secretary; and then-Finance Secretary Lester Thompson.

At the meeting, Broadbent suggested that investing in horses would be a good way for the Collinses to make money, Compton said. According to the prosecutor, Thompson then urged the governor to leave the meeting before details were discussed.

Compton said that Lynn Luallen, former executive director of the Kentucky Housing Corp., was a key part of the alleged extortion scheme, by acting as a liaison between state officials and investment bankers at the two firms.

According to Compton, Luallen also played a major role in getting Donaldson to put up $35,000 for a custom-built grand piano that the governor's husband gave to her as a Christmas present in December 1984.

Officials at the two firms have said since allegations first arose that they played no part in an extortion or conspiracy scheme.

The prosecution also presented evidence that between April 1984 and May 1986, the net worth of the Collinses jumped from $274,000 to $2 million.

"The proof will show these people [in the securities firms] were making investments so they could get these contracts," Compton said in court Tuesday, summarizing the prosecution charges. "These were not payments for investments, they were extortion payments."

In the opening argument for the defense, Bill Collins' attorney, Frank Haddad Jr., sought on Tuesday to rebut the state's charges.

"The proof in this case is going to show that Dr. Collins committed no crime whatsoever," Haddad said. "He was married to a government official while trying to operate a legitimate business."

Collins' lawyer also warned that the testimony of Thompson may not be reliable.

Thompson "is going to make up a lot of things," Hadded said. "You'll find his credibility as a witness will be absolutely no good."

According to the 18-page indictment handed down in July 1992, between 1983 and 1987 Bill Collins and Thompson, the finance secretary, sought and received contributions to Collins' 1983 gubernatorial campaign and inauguration from officials at the two securities firms. The indictment also said that Bill Collins set up thoroughbred horse partnerships as a vehicle for obtaining bribes from the two firms, and that he illegally solicited $35,000 for the custom-built piano.

The indictment alleges that Bill Collins also told officials at Donaldson in October 1983 that they must contribute $25,000 in political contributions to be considered for state bond work.

Following contributions from Donaldson of $12,000 to the state Democratic Party and $13,000 to Martha Layne Collins' inaugural committee -- and meetings between the governor's husband and senior vice president William Johnston and managing director Joseph Harcum -- Bill Collins then "instructed" Thompson that Donaldson would be named senior manager on a $300 million Kentucky Turnpike Authority bond issue, the indictment says.

In August 1984, Bill Collins told Thompson to appoint Donaldson senior manager of a $100 million Kentucky Housing Corp. bond issue and Cranston Securities as co-manager of that bond issue, according to the indictment.

Between September and November 1984, the indictment says, Bill Collins directed Robert Kanuth Jr., then Cranston's chairman, to buy a $100,000 thoroughbred horse partnership, and officials at Donaldson to invest more than $1 million in various horse partnerships established by Bill Collins.

According to state records, Donaldson was lead manager of three issues sold during Collins' term as governor: a $300 million Kentucky Turnpike Authority offering sold in 1984, a $100 million state Housing Corp. issue sold in October 1984, and another $100 million issued sold by the housing authority in November 1985.

During Collins' governorship, Cranston was lead manager of all five Kentucky Turnpike issues sold since June 1985, totaling $2.12 billion.

Neither Donaldson nor Cranston had previously been lead underwriter for debt sold by the state of Kentucky.

Donaldson earned about $500,000 in management fees for its work on state bond issues and Cranston made about $1.3 million, according to state officials.

Cranston Securities was bought by Cleveland-based Prescott, Ball & Turben in 1987.

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