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Counsel for Missoula public water effort involved in Spokane scandal
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Counsel for Missoula public water effort involved in Spokane scandal

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022813 John Engen

Missoula Mayor John Engen says Missoula City Council members must attend meetings in person, not remotely, if they want to participate.

The lead attorney on Mayor John Engen’s negotiating team for public water was a key figure in a deal that led to a multimillion dollar federal securities fraud case in Spokane more than a decade ago.

Based in Spokane, Roy Koegen of Koegen Edwards is bond counsel on the Missoula team working to purchase Mountain Water Co. from the Carlyle Group. The firm he worked for during the protracted legal and political battle to build a mall in downtown Spokane is Perkins Coie, also a consultant for the city of Missoula’s bid to own its own water system.

In the end, the River Park Square project kept downtown Spokane alive, according to Koegen. But an investigation by Camas Magazine from 2000 to 2005 showed the deal entangled the city, bondholders and the developer – a prominent Spokane family – in a financial boondoggle for which taxpayers are still paying.

“He (Koegen) was not only sued by his client, but Perkins left Spokane,” said Tim Connor, the journalist who reported on the ordeal. “It was practically unimaginable that this would happen.”

Neither Koegen nor his former firm Perkins were implicated in the fraud.

In Missoula, many citizens support Engen in his quest to secure a public water system for the community. Some others have asked the mayor to present the worst-case scenario for the estimated $50 million to $70 million potential purchase from the global hedge fund, but Engen has said the worst scenario is if the city of Missoula can’t buy the utility and its water rights.

In a couple of ways, the city’s pursuit of a public water system appears insulated from some of the mistakes that were made in Spokane. First, elected officials are pressing for transparency (see accompanying story). Second, the scandal in Spokane shaped the way Koegen will work as bond counsel on behalf of Missoula.

“The lesson I’ve learned is to give good advice,” Koegen said in a phone interview. “If it’s not followed, and if it’s important advice, you withdraw in writing and express the reasons.”

***

In Spokane, city officials wanted to revive their ailing downtown with a shopping complex, but the financing was fraught with problems.

Koegen, a nationally prominent lawyer in municipal finance, was supposed to be the fixer who would resolve the mess with his “magic briefcase,” said Connor, whose reporting of more than 800 pages is archived at camasmagazine.com. In the end, though, the Internal Revenue Service found the “rigged” deal had artificially inflated the value of a parking garage to improperly funnel tax-free bond money to the developer.

Initially, Koegen warned the city of Spokane against the transaction, saying the deal put too much profit in the hands of a private developer to qualify for tax-exempt bonds. So Koegen wouldn’t sanction their use, and he withdrew as bond counsel for the city.

However, he continued to represent the Parking Development Authority, another party in the snarled financial transactions. When the deal went south, Koegen was unfairly scapegoated by his former client, who alleged in a lawsuit that he had not disclosed the financial risks of the project, according to reporting by Camas Magazine.

As the lawsuit progressed, however, discovery revealed Koegen had worked closely with elected city officials, and he had not kept them in the dark at all, Connor said. But Connor also said Koegen “had some ethical obligations that he mishandled.”

“I think even he would agree in retrospect that he should have drawn the line and said, ‘Don’t do it,’ ” said Connor, now with the Center for Justice in Spokane.

Koegen rang alarm bells about problems with the financing, but he did so to mostly an audience of insiders working behind closed doors. When he was pressured to help close the deal, he did so “despite his own reservations,” Connor said.

The wider public never got the full story because the family developing the mall also owned the Spokesman-Review newspaper and pressured reporters on the beat, according to the Camas investigation.

***

In an interview, Koegen said he and his firm believed the way the deal was structured was wrong, and initially, he said they did everything they could as the city’s legal counsel. The firm refused to approve the financing, and it withdrew as bond counsel for the city, one of just two times Koegen has withdrawn from clients in his career, he said.

He dismissed the lawsuit against him as part of the politics of the case; the River Park Square legal paper trail is long and thick, and multiple law firms were sued and, Koegen said, eventually agreed to settle out of court because it was the most cost-effective resolution.

Later in the same interview, Koegen also said he would have done more if faced with the same situation again: “In hindsight, we just didn’t go far enough. That’ll never happen again.” He would have said no louder, and he wouldn’t have participated at all, Koegen said.

In Missoula, Koegen and other consultants will be paid for their work only if the city closes on a purchase of Mountain Water Co. This deal, estimated to be worth at least $50 million and less than $80 million, is different than the one that involved the private developer in Spokane.

Koegen, though, said if a transaction doesn’t pass legal muster or creates too much risk for taxpayers, he will put the brakes on the purchase and step aside: “I would withdraw. I wouldn’t take any chances. And I would make what we call a noisy withdrawal. We would tell people publicly why we were doing it.”

Plus, he said, he suggested a way for the city to safeguard the deal by hiring a third party. The city did so, and Perkins Coie, Koegen’s former firm, will be paid by the hour, so it doesn’t have the same financial incentive the other consultants do to push for a sale.

Koegen also said the process must be public, and all the risks must be disclosed to the public: “This whole thing has to withstand sunlight.”

***

Connor agreed the matter needs a full airing in a public forum.

He also said it’s a good idea that Missoula has a party involved that doesn’t have a financial stake in evaluating the possible Mountain Water purchase. Taxpayers will need to know their legal financial obligation, and they will need to understand exactly how much of their money is on the hook and for how long.

Koegen lost a lot in the River Park Square maelstrom, and Connor wondered whether the man with the “magic briefcase” would be able to work in municipal finance again. He has, including roughly 10 years for the city of Missoula.

“It says something that Roy was able to rebuild his career and stay involved doing these deals,” Connor said. “This is a really, really bad day if you’re in his line of work, to get sued by your client and have to close up shop (in Spokane) over a bond deal gone bad that resulted in a municipality taking a really big hit.”

Reach Keila Szpaller at @keilaszpaller, at keila.szpaller@missoulian.com or at (406) 523-5262.

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