Civic Accountability -- Honesty in Local Government I

[Mark Kindt]

Thank you Stan and Bridget for your questions.

Given the complexity of both the federal securities and antitrust laws, there is no short, accurate answer to each question you pose.

Here's a general, but very qualified, look:

The statute of limitations that might be relevant to a securities law claim is between two and five years and depends on a variety of factors.

The statute of limitations for a federal antitrust law claim is generally 4 years with some exceptions.

Generally, in each hypothetical case that I am describing, ordinary citizens would not have viable claims or standing to sue.

Standing to bring a lawsuit under either the securities or antitrust laws is always a complicated topic and must remain outside the scope of my presentation here.

All the best! --Mark

[Stan Austin]

Mark-- thanks for your response. Even though Bridgett asked who would have standing to sue I think a more relevant question would be who would be the victim of such a potentially catastrophic legal action. I'm thinking, right off hand, US!!!!!!!!!!!!

[Mark Kindt]

Dan, your observations are acute!

Statements made by city officials with respect communications with Metro Health System in 2015, while superficially accurate, may have actually further misrepresented the fact that Metro Health System had submitted a superior proposal during the proposal solicitation process. Such statements would aggravate and could advance a securities law claim adverse to the City.

While I am not going to explore this topic here, it is reasonable to assume that Lakewood Hospital could have had a life far beyond the 2026 lease expiration date; continuing lease, income tax revenue, or even other revenues to the City far into the future. Hospitals typically can fund capital improvements through patient revenue bonds. Our local port authority also assists in third-party bond offerings. Metro would have had access to both public debt vehicles. However, the City made a decision to end these potential future revenue streams.

I am not challenging that decision, only the process by which it was made with a resulting exacerbation of legal liability risk.

To the extent that the decision-making process was closed, outcome-determined, short on governmental process, it inevitably increased actual and potential legal liability to the City.

Yes, public officials have the latitude to make poor, even bad decisions. (Happens all the time!) However, process does count. More on that in future posts.

[Stan Austin]

Another question--- would indemnity insurance have been an essential piece of this process in order to protect us, Lakewoodites?

[Mark Kindt]

While I am sure that the City has an active insurance program given its scope of activities, neither liability insurance, nor property insurance would provide protection against the potential claims that I am describing. However, depending on the policy, these types of insurance ordinarily cover the cost of legal defense.

[Mark Kindt]

A few additional thoughts.

My purpose in describing the potential antitrust case was simply to illustrate how triple damages work and how the scale of such damages might impair the economic viability of a city. Remember, the SEC legal actions were all against localities that were in difficult financial straights. A decent antitrust case exists under the facts that I have described, but the antitrust issues, while within my scope of expertise, are outside this presentation.

One reminder: Nothing I write here is legal advice to anyone. I write solely in the exercise of my state and federal constitutional rights to freely discuss issues of a public nature in a public forum. Finally, I do not represent any person as an attorney related to these topics, not do I seek to represent any such party.

Tomorrow, I will review some of the actual litigation against the City that stems from the decision to close the hospital. I will also continue my review of some additional issues relating to potential securities litigation.

--Mark

[Bridget Conant]

I write solely in the exercise of my state and federal constitutional rights to freely discuss issues of a public nature in a public forum

True.

But witness past experience -many in this city, lawyers and politicians alike, do not understand or respect First Amendment rights.

[Mark Kindt]

So far, I have described a closed proposal process that rejected a superior proposal from a highly qualified provider, and then hid the contents of that proposal from review by relevant elected officials (most council members) as well as from the citizenry. I have also described multiple express and published misrepresentations by the city administration about the dollar value of the decision to close the hospital.

How is this all working out for the City in the real world?

The City faces the following lawsuits related to the decision to close the hospital:

1. The Open Meeting Lawsuit
2. The Public Records Lawsuit
3. The Fraud Lawsuit

The City also faces the reasonable possibility of having to defend itself from at least three other potential lawsuits.

1. A taxpayer lawsuit to prevent the distribution of funds to the new foundation
2, An excluded bidder antitrust lawsuit
3. A securities lawsuit

How has the plan to close the hospital affected the City's litigation risk? Well, I think we can safely say that it has increased it considerably. Would openness, transparency and honesty have reduced it? Probably.

Next post will address Disclosure Problem No. 3. -- The September Editorial

[Mark Kindt]

As we review Disclosure Problems No. 3 and No. 4, we will see that the problems that I have previously described continue up to the present and actually increase the severity of legal risks to the City.

Quoting from the SEC Harrisburg Release, let’s keep in mind the duties of our local officials to be honest about material financial matters:

“Public officials should be mindful that their public statements, whether written or oral, may affect the total mix of information available to investors, and should understand that these public statements, if they are materially misleading or omit material information can lead to potential liability under the anti-fraud provisions of the federal securities law.”

Disclosure Problem No. 3: The September Op-Ed Article

In a September 2016 Op-Ed article (link below), a city official with knowledge states that “At risk is more than $100 million of investment in health care currently underway.”

Clearly, if the statement was false, misleading or omitted material information, the public official should not have made the statement. It should have been rigorously reviewed to ensure compliance with the securities laws.

If the statement was true, it can be substantiated. If it cannot be substantiated, it should be qualified to be accurate.

As finance director, the author is a public official, who knew that the statement could not be accurate given the author's actual knowledge of the offsets, losses, shortfalls and wind-down costs related to the so-called "investment" written of in the Op-Ed article.

We now know that the net value of this “investment” is closer to a nominal value of $0 (or negative by some calculations) than to the $100 million "value" asserted in the Op-Ed.

Our hypothetical class action securities lawyer would no doubt latch onto the official publications of the city administration from February 2015, that more accurately described the impacts from the proposed transaction to close the hospital.

Finally, the article also continued the earlier misrepresentation (an omission) about the decision of one of the non-participating providers (Metro).

Please review the Op-Ed article yourself at this link: http://www.cleveland.com/opinion/index. ... l_iss.html

I appreciate your continued interest as we explore these issues of open government and accountability. --Mark

[Lori Allen _]

Mark, thanks for your input. It is really interesting.

[Bridget Conant]

That "opinion" is wrong on so many counts. Reading it now just makes it all the more absurd.

Was anything they said true?

[Mark Kindt]

Be patient this is a long and complicated explanation. If I had a category for it, I would name it "Can they dig their ditch any deeper?"

Again, I carefully quote the words of the U. S. Securities and Exchange Commission:

“[…] the statements of those public officials who may be viewed as having knowledge regarding the financial condition and operations of a municipal issuer should be carefully evaluated to assure that they are not materially false or misleading.”

“[…] public officials may have liability under the anti-fraud provisions of the federal securities laws for such statements.”

Disclosure Problem No. 4 should be deeply disturbing for any attorney reading this presentation, since it describes material statements about the financial condition of the City that are likely false and have been sworn to and filed in state court.

As background, the plain meaning of the Master Agreement is that CCF or LHA will pay certain funds to the New Foundation and not the City of Lakewood.

Disclosure Problem No. 4: The Statement Filed in Court

In October of 2016, counsel for the defendants in Skindell v. Madigan filed several statements to support a motion before the Ohio 8th Circuit Court of Appeals. In one of those statements (Exhibit A) describing payments to be made under the Master Agreement, the city administration states as follows:

“9. On March 1, 2016, $200,000 was paid by CCF to the City to begin the process of forming a new community wellness foundation. The Master Agreement requires an additional $32,200,000 be paid to the City by CCF for the community wellness foundation in various installments over 15 years commencing when the FHC opens.

11. The Master Agreement requires that CCF and/or LHA make additional payments to the City totaling $42,220,833.34.

12. The total cash payments that the City will receive from CCF and/or LHA as a result of the Master Agreement will total $51,889,314.89.”

I have underlined the key relevant text.

Clearly, each of these statements is false on its face given the actual terms of the Master Agreement.

The City of Lakewood is not receiving any of the total sums listed in these 3 quoted paragraphs of Exhibit A (Paragraphs 9, 11 and 12). (Obviously, it did get the $200,000 quoted in Paragraph 9)

Each paragraph in the city administration statement includes the value of future payments to a third-party (“New Foundation” in the Master Agreement) that most obviously is not the City of Lakewood.

These paragraphs expressly over-value the actual future payments to be made to the City of Lakewood under the Master Agreement. If the total value of these payments were to be paid to the City of Lakewood, they would be reflected in the Master Agreement. They are not.

Exhibit A has three major problems.

1. The city administration has likely propounded a false statement to an Ohio appellate court.

2. The city administration has made multiple material misrepresentations with respect to the financial condition of the City entirely inconsistent with the securities laws.

3. Given prior multiple material misrepresentations made to date with respect to the deal to close the hospital and an official sworn statement in a state court, there is now ample predicate for either an amended taxpayer lawsuit or a separate lawsuit to obstruct payment of the described funds to anyone but the City.

Obviously, the City has a legal duty and the City law department has a profession duty not to mislead the Court with these sworn statements. They must be corrected immediately.

Disclosure Problem No. 4 concisely exemplifies the types of severe legal risks taken by the City and it officials. While it “may” have been done in ignorance, it was done by experienced professionals with access to sophisticated law firms and is entirely consistent with other misrepresentations described here or by others in other publications or posts.

Hence, my deep concern for openness, transparency, honesty and accountability in our local government.

[Bridget Conant]

Mr Kindt

Your thoughtful and analytical posts are much appreciated.

Would you be able to share a bit about your professional background?

It might be useful for readers to know about your experience as they assess the information you are providing.

Thanks.

[Mark Kindt]

Ms. Conant,

Happy to oblige. I am now in my 37th year (yikes!) of the practice of law. I now specialize in environmental law with a focus on the remediation of major environmental sites. While I am admitted to practice in Ohio and other jurisdictions, most of my legal practice is related to federal litigation or EPA-related matters outside of Ohio.

I spent the early part of my career as a government attorney in the following roles:

Special Assistant United States Attorney
Assistant Attorney General (OH)
Deputy Attorney General (WV)
Regional Director, Federal Trade Commission

One highlight of my career is the fact that I was privileged to testify before a Congressional committee in 1987 with respect to insurance reform issues. (And that seems like a lifetime ago!)

Since those days, my practice has focused on antitrust, business transactions and environmental law. My practice now is primarily related to the environment and environmental insurance coverage.

My knowledge of the matters discussed in this line of posts comes from my personal review and study of numerous documents related to the deal to close the hospital. For me, this began the day that I attended the press conference in January 2015 and has held my attention ever since. Other attorneys have embraced this matter and know more. I try my best to keep up with them.

I am very proud of the citizens of Lakewood for their focused engagement and participation in our community.

--Mark

[Stan Austin]

Mark-- Another question if you don't mind----- why your relatively late (but appreciated) entry into this discussion? Stan