Illegal bond sale draws lawsuit

By Brian Kelly

Herald Writer

FREELAND — The Holmes Harbor Sewer District and the former commissioners who signed off on a $20 million bond sale that the state said was illegal were hit with a class action lawsuit Monday.

Three people who bought $5 million of the bonds are suing the sewer district, claiming those who were involved in the controversial sale had committed fraud by not telling investors the bonds were illegal under state law.

"Our clients hold bonds that are worthless. And they want their money back," said Janissa Strabuk, an attorney serving as co-counsel on the lawsuit.

The suit is the first stemming from the troubled bond sale, which, if defaulted, would be the biggest municipal bond default in the state since the $7 billion power plant building fiasco by Washington Public Power Supply System (WPPSS) in the 1980s.

The stink over the bond sale comes from the Holmes Harbor Sewer District’s creation of a special assessment district in south Everett, which commissioners approved so Mukilteo developer Terry Martin could build a six-building office complex called Silver Sound Corporate Center.

Martin used $6.2 million of the $20 million in bond sale proceeds to buy a 39.45-acre Everett property that was valued at $1.5 million, and the developer also received an undocumented $1.5 million payment from the bond sale. Although investors were told the office complex had a tenant and construction would start in October 2000, Martin never received permits to build, and the land is still sitting undeveloped.

State auditors said the district had violated numerous state laws because the special district was created well outside the boundaries of the Holmes Harbor Sewer District, and the bond sale benefited a private developer and did not serve a public purpose.

All of the commissioners who were involved in the deal have since resigned.

Those commissioners — Bill Spalding, Linda Zoll, Don Wills, Don Cardner and Heather Houlihan — were individually named in the lawsuit, as well as the developer, Martin, the financial firms that sold the bonds, and the lawyers who represented the developer and the sewer district.

Former commissioners refused comment Monday.

"Don’t know a thing about it. It’s all new to me," Cardner said.

"I’ve not even been notified of such a thing. I’m not in a position to comment," Zoll said.

Martin did not return calls. A receptionist at his company, Marwest, Inc., said he wanted to speak to a lawyer first.

The lawsuit was filed Monday in King County Superior Court. A trial date has tentatively been set for March 2003.

Strabuk, co-counsel for the bondholders, a Bellevue couple that bought $4 million of the bonds, and a King County man who invested $1 million, said the law firm has identified 93 investors who were effected by the bond sale. But there may be more, she said.

The former commissioners, most of whom resigned after the bond sale was labeled illegal by the state auditor and the attorney general’s office, were named in the lawsuit because they were told beforehand the sale was illegal, Strabuk said.

According to the lawsuit, the sewer district’s attorney, Mark Hansen, told the commissioners repeatedly that the bond sale was illegal. The district later fired Hansen and went forward with the bond sale, despite advice from state officials who also questioned the deal.

"Based on our investigation, we think they were adequately and fully informed that this was illegal. But they went ahead anyhow. We think they face some liability because of that," she said.

Meg Wingard, a commissioner who joined the board of the Holmes Harbor Sewer District after the scandal became public, said the lawsuit was not a surprise.

"Basically, it’s been clear to me that this was going to happen sooner or later," Wingard said "My sense is the shoes keep dropping. It’s not two shoes, it’s not four. Is it a centipede? Maybe it’s a lot, and they haven’t all dropped."

You can call Herald Writer Brian Kelly at 425-339-3422 or send e-mail to kelly@heraldnet.com.