The Secretary of State charged developer David Watkins diverted bond proceeds meant for the Retro Metro project to another project in Meridian, at a hearing yesterday at its office. The Securities Division seeks to impose a $25,000 fine and repayment of the $587,084 it claims was diverted.
The complaint against Mr. Watkins states he formed Retro Metro, LLC for the Metrocenter project. Retro Metro renovated the building and leased it to the city of Jackson. The Mississippi Business Finance Corporation issued $5.195 million in taxable revenue bonds to finance the project.
The complaint states an unknown development agreement existed that stated Retro Metro would pay Watkins Development a "flat fee of $500,000 and a mobilization fee of 25% of project cost." Mr. Watkins filed a certificate of formation with the SOS for another LLC, Meridian Law Enforcement Center. Mr. Watkins used that company to renovate a building in Meridian for the Meridian Police Department. The city of Meridian later removed Mr. Watkins from the project after repeated delays. Mr. Watkins wired (not alleged, as he admitted it at the hearing yesterday) $587,084 from the Retro Metro account to the escrow account of a Meridian law firm of Hammack, Barry, Thaggard, and May. Mr. Watkins then used the money to purchase the property for the project in Meridian.
The state accused Mr. Watkins of making "material misstatements" in the bond documents as they allegedly failed to disclose Mr. Watkins' intent to finance the Meridian project with proceeds from the Retro Metro bonds. Mr. Watkins is thus accused of defrauding investors by making untrue statements that caused them to purchase the bonds.
The state became interested in Mr. Watkins activities after bond counsel Keith Parsons of Jones Walker reported the alleged misrepresentations to the state. Mr. Parsons testified for over two hours yesterday. His testimony sparked several heated exchanges with Watkins attorney Brad Pigott. He prepared the private placement memo for the sale of the bonds. He repeatedly accused Mr. Watkins of "comingling" and "misappropriating" funds from the sale of the bonds. He said the money Mr. Watkins diverted from Retro Metro to MLEC could have prevented the bonds from going into default. He said the partners who now own Retro Metro were forced to borrow over a million dollars to complete the project. Mr. Parsons said, "Had I known he was comingling funds, I would have asked more questions."
Mr. Parsons said the project was supposed to be completed in the summer of 2011. However, the project was not completed until 2012 and thus required another million dollars in financing. He said, "it all comes down to money not being spent" directly on the project. He said few records were kept and it was almost impossible to know how the money was spent. Mr. Pigott accused him of having hostility towards Mr. Watkins and said, "You are just frustrated you can't do your accounting."
Mr. Watkins testified for over two hours. He said the state had never interviewed him nor asked him about the transfer of the money. He testified he had one account that had "multiple revenue sources" that was used for different projects. Mr. Watkins said he had to close the Meridian deal quickly as it faced an upcoming deadline. Mr. Pigott spent much of the time asking Mr. Watkins questions about the Meridian and Metrocenter projects. Mr. Watkins also stated that Retro Metro owed him money. Mr. Pigott said no one "works for free."
It must be pointed out this case is one of a civil nature as the Secretary of State has no authority to engage in criminal prosecutions. It can refer the case to the Attorney General for such prosecution. It is unknown if the Secretary of State will take such action.
Note: This correspondent tried to obtain a copy of Mr. Watkins' brief but was unable to do so. Somewhat mystified by this as it presents his defense and thus his case in a better light. This is an interesting case. It is a commonly accepted principle in bond sales that proceeds from sales of bonds must be used for the stated purpose for the sale. The key issue here is what did the bond contract state and was it violated, and if violated, was the violation of a fraudulent nature. Here is a Wall Street Journalon the problems cities faced when spending bond money for something other than the stated purpose.
Video will be posted later today. WLBT was present but nothing is posted on the website.
Jackson Free Press has a good account of the hearing.
Copy of lease between Retro Metro and Jackson and deed of trust.
Link to private placement memo for sale of bonds.
Note: Here is the video. Apologies as I thought the camera was rolling and didn't realize the failure until 11:30. First two videos show Mr. Parsons testifying. The second two show Mr. Watkins testimony.
Wednesday, October 30, 2013
Secretary of State Accuses Developer of Fraud in Metrocenter Project at Hearing (Updated w/video)
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43 comments:
If he had "multiple sources of financing" as the JFP article states, why transfer money from Retro Metro? Sounds very lame to me.
Also, Meridian finally figured out Watkins is more talk than walk.
Only read the JFP if you want the Reader's Digest version of events. They've left out many details.
Watkins hasn't confirmed any accusations, but there were red flags. Off topic, why hasn't Hoseman given attention to egregious actions of the Hinds County Board of Supervisors, as some have suggested?
There appears to be a tax avoidance issue here as well. Since he had partners in RetroMetro, even if they "owed him money", the other partners of RetroMetro weren't part of the Meridian deal. Just Watkins. The right way would have been for Watkins to take a distribution, which would have been taxable and then place the required proceeds in the Meridian deal.
Watkins got too cute with accounting and tax avoidance and it looks like he's about to get burned.
I have to agree with 9:13.
Seems like there was $50K or so that another group put up on the Metro project. They later inquired as to how it was spent, and Watkins stated that 'every penny at Metro had been accounted for'. Yet I don't recall specifics on how he responded. Is this current situation related to that previous (recalled) dodge?
Cash flow. It has been detailed at length here at JJ for a long time now. Watkins has big cash flow problems.
So when will there be a decision?
That law firm Hammack Berry in Meridian is probably going to have a lot to answer for too. They "knew or should have known" about those proceeds and where they were coming from if they were closing the loan on making the purchase. If they represented Watkins, there's no way they couldn't have known.
If there were any legal opinions provided for that deal, it could be their ass.
"multiple sources of financing" = "commingling of funds," unless you segregate the funds into multiple bank accounts. But those are really hard for douchebags to get.
It's all starting to pile up on Mr Watkins, isn't it? When these situations start happening, they rarely just go away. I foresee prison in Mr Watkins' future.
Maybe State Auditor Stacey Pickering's office could actually do their job and monitor and investigate this type of stuff if they were not so busy trying to put low level court clerks in jail for swiping $1000 bucks, or trying to keep all of their millionaire friends and contributors at DMR out of trouble. He is the single most disappointing elected state official I have seen in a long time, even here in Mississippi where the bar is set pretty darn low.
I bet JRA was tipped off to Mr. Watkins' dealings and dropped him from the Farish Street project. It all makes sense now. The plot thickens!
This does not fall under his jurisdiction.
Things/situations change, and shit happens!
2:24 look at it this way: you didnt see Watkins Eager fall even after representing the Fraziers and the Evans brothers...
It ain't got shit to do with cash flow, 10:09. There are multiple ways of addressing cash flow issues that are not illegal.
OK Albert Einstein at 5:10. Name one. Negative same ole same ole AH.
um, maybe Stacey can find the $26,000,000.00 (that's 26 million for you jsu gradechts) that has gone missing way down younder on farish street.
Just an FYI that probably doesn't mean squat ... but a principal of the law firm in Meridian is the husband of Meridian's former mayor (lost in last election to the ridiculously incompetent Percy Bland [can you say Ike Brown, Bennie Thompson & son of woman insurance agent in Jackson?]) that pushed the police station & Watkins along in a large way. He is also,unless I'm wrong, Board Attorney for Lauderdale County. His brother, I'm told, handles bonds over in the big city.
This kind of stuff happens all the time with developers. What complicates his situation is the govs money involved.He better go ahead an plan some fundraisers for the SOS and Ms.AG and the Ms.State Auditor, cover all bases.He also needs to hire Frontier to do all future PR. This will help get everybody on board.
Only a matter of time for Watkins to get caught. He greased enough palms in Jxn, but not Meridian. Hope it is Parchman.
8:43, Watkins is a Democrat.
Misappropriations are very serious, but tax fraud will mean Federal prison. (If there's any justice left in our Country) His attorneys better get their fees upfront.
Anonymous said...
2:24 look at it this way: you didnt see Watkins Eager fall even after representing the Fraziers and the Evans brothers...
October 30, 2013 at 5:08 PM
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it was just one attorney at W&E and he has always seemed to have real estate clients like that
Multiple lessons from this fiasco, three of which are: Don't over leverage, cover your ass, stay away from government entities.
Mr. Parson works for Jones Walker LLP, not Walker Jones - former Ole Miss linebacker and Director of Sports Marketing for Under Armour
Seems to me that the JRA and Socrates have made Dilbutt their own private little white bitch. Dollars to doughnuts says that Socrates, LeRoy and company filed the complaint to try and force Watkins to abandon his lawsuits over Farish Street. Once he's gone, Socrates will swoop in make some real graft, oops I meant real honest cash.
Why is the SOS office into a matter that is civil dispute? This is crazy and smells funny.
2:48 - Bonds were sold. SOS enforces securities violations
Just in reading the CL, JFP and JJ, my money is on Watkins. The JRA seems hopelessly conflicted and inept (ie: stupid)
I agree with RINO Whitwell. The JRA is embarrassing. What is with the clear double dipping regarding clients? Is Zach Taylor still the JRA God over there?
Hosemann has really screwed up with this. Can you say "Jones Walker"? If you listen to the video of Keith Parsons, you'll realize what a fool he is and that this is a stupid waste of taxpayers money.
On the contrary. The 4 securities violations of Watkins were proven during the hearing. He admitted transferring the money from the Retro Metro bond account to buy the Meridian Law Enforcement Center.
No big surprise 4:54. This has been public knowledge for a long time. Nothing was "hidden" from the other investors. Seems to me they are attempting to throw Watkins under the bus and squeeze him out of his investment, hiding behind a lawsuit filed for financial convenience.
Not sure that's exactly right, 8:17. Keith Parsons certainly isn't going after Watkins to help the other Retro Metro investors. If the bonds went into default (which is at least implied, but not clear) and Parsons was bond counsel, he may be facing an E&O claim from the bond buyers - which would at least partially explain some of the personal hostility between him and Watkins.
It's also interesting to note the incestuous relationship of all the folks currently firing at David Watkins - Keith Parsons and Zach Taylor (JRA counsel) are both at Watkins Ludlam / Jones Walker, and Cheryn Netz was also there for many years. Was Delbert ever part of that firm, too? I wonder if Jones Walker ever represented any of the New Orleans folks David brought into the King Edward deal.
Watkins claims Watkins Development was "owed" up to $625,000 from Retro-Metro, and therefore was entitled to use those funds for the Meridian project. Here's the first problem with that argument - the 25% was supposed to cover "mobilization costs," which Watkins admits typically consist of things like insurance, professional fees and other things directly related to the project. Yet he presented zero evidence of any such expenses actually incurred. He just acted as if he was automatically entitled to 25% of the amount which Retro-Metro would eventually be obligated to invest. Those are two very different things.
Even if that argument holds water, it's ridiculous to claim he did't "physically have time" to transfer funds from the Retro-Metro account, into a Watkins Development account, and then Great Southern Bank for the purchase of the building in Meridian. We're talking clicks of a button here, assuming he's entitled to do it. Instead he pays for the Meridian property directly out of the Retro Metro account. That's a big problem, and his candid admission that he had a "time crunch" (meaning, "money crunch") on the day of the closing doesn't help. Corporate formalities matter - a lot.
Pigott (BTW, what happened to his toupe? Very disconcerting to see him without it . . .) focused on the fact that the other Retro-Metro members never complained, but that's completely beside the point - it's the bondholders that matter, and they had the right to expect the bond proceeds to be utilized for project costs, including "mobilization costs."
And BTW, Sam Begley sure had a sweet deal. Five percent ownership of Retro-Metro and hourly billings to same, in return for which he "acts as liason" to the City - which apparently included persuading Harvey to move all kinds of city employees out of the Medical Mall and into the Metrocenter. Democratic crony capitalism at its best! That's why Watkins saw a deal when none of the other "dozens of developers" they tried to schmooze in Las Vegas could see one - none of them had a Begley on the team.
Oh, and one more thing. Watkins testified that the rent from the City was more than enough to cover the bond nut - and that was for way less than half the space in the Metrocenter. If he'd been able to persuade JPS to bring all of its people into the second floor (and considering his long relationship with JPS and JPS "outside counsel" Dorian Turner - who formerly worked for David - that was not an unrealistic hope)this deal would have sung. What might have been . . .
@4:54 - you must work for the Jones Walker securities law department. I've done securities work before, in Mississippi, Louisiana and in D.C. I watched the video and realized about 30 minutes into Keith Parsons testimony (which was more like a rant than testimony)that there was nothing to this other than Jones Walker trying to use the SOS to squeeze Watkins for more money for its clients. Brad Pigott destroyed both witnesses for the SOS like I've never seen before. I don't see ANY securities fraud proven here. NADA. I may have missed it, but I didn't see a bond purchaser testify or anybody even offer any proof of damages! My 2 cents worth is that there is no securities fraud case proven here. The only people complaining are the Jones Walker clients that kicked Watkins out of the deal to take it over. Apparently, they didn't get enough blood out of him the first go round.
@10:04 Were you at the hearing? Are you a securities lawyer? Just curious. I've tried to look at the video but there are some gaps it seems.
So, distribution of bond proceeds for Retro Metro only, for purchase of the Meridian Law Enforcement Center isn't a violation? I guess Retro Metro owns the Meridian property then? Good grief.
I didn't see Pigott destroy either witness.
interesting comment, 10:04. You seem to have a lot of inside information and perhaps some answers. I thought in a securities fraud case the burden was on the government to prove its case, by clear and convincing evidence? Isn't that the standard for fraud? Perhaps Watkins might have been lame in his testimony on what he was "owed" him at the time of the transfer, but its up to the prosecutor to prove the case. I didn't see anything on the videos that show any proof at all.
11:35 - another Jones Walker plant. I admit I wasn't at the hearing, but I did view the tapes. I guess I must have watched a different hearing than you did. Pigott destroyed Parsons as a witness. Man, that came through very clear even on a low resolution monitor!
10:04 here. I certainly don't claim to have any inside information - I just watched parts of the first two video clips linked above and then the entirety of the last one, which features Watkins' testimony. Although I'm no bond expert I've done enough contract and business law to understand what actually happened here, versus what was supposed to happen.
Kingfish has pointed out numerous times that Watkins had cash flow problems, but this is the first time I've seen Watkins admit so himself (and yes, I'm equating "time crunch" with "money crunch"). He talks about the "hundreds" of project he's been pursuing, and eventually his reach exceeded his grasp. That's precisely when developers are tempted to take money earmarked for one use then apply it to a different one. That's fine if it's the developer's own money, but borrowed money (in this case, bond proceeds)is not, at the end of the day, the developer's money. Ignore lenders' rights at your own peril.
This kind of case is built more on documents than testimony, BTW, so whether or not Piggot "destroyed" Parsons is mostly irrelevant (and, for FWIW, I wssn't that impressed with either one). At times during Piggot's examination of Watkins, it sounded like he was actually making the SOS' case.
Last but not least - Delbert Hosemann has done more successful business deals (both for clients and personally) than everyone else at that table combined, and he knows a stinker when he sees one. Don't think he didn't personally sign off on the Complaint against Watkins, even though Netz is carrying the ball.
I hope Zach Taylor goes DOWN.
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