Dillon Read (9): Dillon’s Investment in Cornell

On February 21, 1991, after I had left the Bush Administration and remained in Washington D.C. to invest in my own start up, Hamilton Securities, Dillon Read’s Venture group invested in Cornell Corrections — essentially bankrolling the creation of quite a different startup in the newly emerging private prison industry. Cornell was founded with David M. Cornell who was Operations Manager - Special Projects of Bechtel and Chief Financial Officer of its subsidiary Becon Construction from 1983-1990.^[33] Cornell Corrections was created to take advantage of plans to privatize the government’s prison operations. The War on Drugs and its related mandatory sentencing were fueling an explosion in the U.S. prison population. The construction and management of new prison facilities was potentially big business for the construction industry — firms like Brown & Root who Cornell used to build their first detention center — and those who financed them — like Dillon Read.

According to a later Harvard case study on Cornell’s facility,^[34] David Cornell was pursuing the prison business while at Becon in partnership with Dillon Read — presumably the part of the firm that helps to create and sell the types of local government bonds that finance many prisons. When Becon decided not to pursue the prison business, Cornell decided to leave and start his own private prison company. With Bechtel out of the business, Cornell and Dillon then decided to use Brown & Root to construct the first prison. Brown & Root was a subsidiary of Halliburton, both based in Houston like Cornell Corrections.

According to Cornell’s filings with the SEC and other corporate reports, Dillon used funds from three of its venture funds, Concord, Concord II and Concord Japan to make these initial investments. Dillon Read’s April 1997 SEC filing described Concord and Concord II as limited partnerships organized under the laws of New York and Delaware.

To understand Dillon’s investments in Cornell it is essential to understand who governed Dillon Read, who at Dillon invested personally as well as who at Dillon along with outside directors helped to govern the Dillon venture funds that invested in Cornell. These are the people who are responsible for the investment decisions and who would have benefited in various forms.

As provided in Dillon’s Cornell SEC filings, Dillon, Read Holding Inc.,^[35] Dillon, Read Inc.^[36] and Dillon, Read & Co. Inc.^[37] listed their officers and directors as including John P. Birkelund, David W. Niemiec, Franklin W. Hobbs, IV, Francois de Saint Phalle as well as senior leadership from Barings, the British bank that was now an investor in Dillon and ING, the Dutch financial conglomerate that acquired Barings when it failed in 1995.^[38]

The presence of Barings in Dillon’s governance structure is noteworthy. Barings, the oldest merchant bank in England and said to be a financial leader in the 1800s China opium trade, collapsed in February 1995 as a result of a trading scandal in Asia and was taken over by ING. Barings became the lead outside investor in Dillon Read in late 1991, when they effectively financed Dillon’s management buying out Travelers. This was the same year that Dillon bankrolled Cornell Corrections. Barings’ difficulties in 1995 may have increased the pressure on Dillon to generate revenues, particularly before it was sold to Swiss Bank Corporation (now part of UBS) in the summer of 1997, changing its name to SBC Warburg Dillon Read.

Peter A. Liedel, a Dillon Senior Vice President joined the board of Cornell and had a Cornell facility contracted by the Federal Bureau of Prisons in Houston in 1996 named after him. (Photo courtesy Willbros Group, Inc.)

In the April 1997 Dillon Cornell SEC filing, the Concord Japan venture fund invested in Cornell is described as a corporation organized under the laws of the Bahamas, whose principal office and business address was c/o Roy West Trust Corporation, (Bahamas) Limited, West Bay Street, Nassau, Bahamas. Hence, Concord and Concord II were “onshore” funds and Concord Japan was an “offshore” fund. The officers and directors of Concord Japan include representatives of some of the largest most prestigious Japanese corporations as well as Amerex SA which listed its address as the Coutts Bank office in the Bahamas. Coutts is considered one of the most prestigious private banks in the world.^[39]

In May 1991, Dillon invested additional funds from one of the Lexington Funds.^[40] The Lexington Funds were created to invest money for Dillon officers and directors. Dillon then made additional investments with these various funds in September and November 1991. By the time of Cornell’s initial public offering of stock in October 1996, Dillon Read and the funds it managed and its officers and directors had accumulated approximately 44% of the outstanding common stock. This meant that they were the controlling shareholders.

Along the way, Dillon officers and directors had personally purchased significant shares of Cornell stock. Investors included Chairman John Birkelund, Vice Chairman Dave Niemiec who signed many of the documents on behalf of Dillon and Lexington, President and CEO Franklin “Fritz” W. Hobbs, IV as well as numerous other senior partners, including Ken Schmidt. Dillon officer Peter A. Liedel, who signed on behalf of Concord, had joined the board of Cornell. Cornell named one of its facilities after him — the Liedel Community Correctional Center, a pre-release facility in Houston.

Note: For the full list of 32 Dillon officers with personal positions, click here. ^[41]

Dillon’s investments in Cornell represent an extraordinary firm-wide commitment to starting up one company. This was not a common occurrence, but as we will see, this was not the first time that Dillon Read had backed a Houston business involved in privatization in an extraordinary way. The decision for an officer and director to buy shares would have been an individual decision — whether they used their own funds or if the firm helped arrange credit or other funds for them to finance their purchases. Hence, this meant that a significant number of Dillon's leadership decided that investing was something they actively wanted to do and for which they chose to be financially and ethically liable. One can only wonder what the Dillon leadership had been led to believe about the future of the private prison business, let alone what it implied about the future of the country.

FOOTNOTES

[33] Prior to joining Bechtel, Cornell was President of Tenneco Financial Services from 1981 to 1982. Prior to that time, he served as an Executive Vice President of Philadelphia Life Insurance Co. and President of Philadelphia Life Asset Management Company from 1972-1981 (See Cornell Corrections October 4, 1996 Prospectus, page 43; 01-0000890566-96-001533_10-04-1996_Prospectus.txt).

[34] Harvard Design School Case Study (http://www.dunwalke.com/resources/documents/Events/Harvard_Case_Study_940101-014.pdf).

[35] Executive Officers and Directors of Dillon, Read Holding, Inc. are listed as:

John P. Birkelund, Chairman, Director and Managing Director of Dillon Read & Co. Inc.
David W. Niemiec, Vice Chairman, Director, Managing Director, Treasurer and Secretary of Dillon Read & Co. Inc.
Francois de Saint Phalle, Vice Chairman, Director and Managing Director of Dillon Read & Co. Inc.
Franklin W. Hobbs IV, President, Chief Executive Officer, Managing Director of Dillon, Read & Co. Inc.
Leendert C. Grijns, Chairman, Internationale Nederlanden Capital Corporation, 135 East 57th St. NY, NY 10022 (Dutch Citizen)
Jan Hessel Lindenbergh, Director, ING Bank, The Netherlands (Holland Citizenship)
This and the information in Footnotes 36 and 37 below are detailed in Cornell Corrections' April 4, 1997 SEC 13-D Filing (SEC/09-0000950162-97-000313_4-04-1997_Sched13d.txt.)

[36] Executive Officers and Directors listed for Dillon, Read Inc. were Birkelund, Niemiec, Saint Phalle and Hobbs and representatives of Dillon investors ING and Barings.

[37] Executive Officers and Directors of Dillon, Read & Co. Inc. were Birkelund, Niemiec, Saint Phalle and Hobbs, Simon A. Borrows, Baring Brothers International Limited, 60 London Wall, London, EC2M 5TQ, Director (UK Citizen) Leendert C. Grijins, Chairman, International Nederlanden (U.S.) Capital Corporation, 135 East 57th Street, NY, NY 10022 (Dutch Citizen) James R.C. Lupton, Executive Director, Baring Brothers International Limited, 60 London Wall, London (UK Citizen) Michael D.G. Ross, Managing Director, Baring Brothers International Limited, (UK Citizen)

Also listed were 52 additional Dillon Read Managing Directors as follows:

Barbara Alexander, Director and Managing Director
Sharyar Aziz, Director and Managing Director
Tamara A. Bush, Director and Managing Director
James H. Brandi, Director and Managing Director
William S. Brenizer, Director and Managing Director
James C. Brennan, Director and Managing Director
John G. Brim, Director and Managing Director
Michael A. Cilia, Director and Managing Director
Frank V. Colombo, Director and Managing Director
Kenneth S. Crews, Director and Managing Director
(Dallas Office—3950 Trammel Crow Lane, 2001 Ross Avenue, Dallas TX 75201)
David M. Dickson, Jr. Director and Managing Director
Charles P. Durkin, Jr., Director and Managing Director
Blair W. Effron, Director and Managing Director
Raul P. Esquivel, Director and Managing Director
Peter Flannigan, Director
Thomas J. Hartfield, Director and Managing Director
John H. F. Haskell, Jr., Director and Managing Director
Anthony B. Helfet, Director and Managing Director
(San Francisco Office — 555 California Street, Suite 4950, San Francisco, CA 94104)
William O. Hiltz, Director and Managing Director
Robert H. Hotz, Director and Managing Director
James W. Hunt, Director and Managing Director
(Dallas Office)
Peter H. Imhoff, Director and Managing Director
Yerger Johnstone, Director and Managing Director
(London Office — 60 London Wall, London EC2M 5TQ) (UK Citizen)
Craig A.T. Jones, Director and Managing Director
Kenjiro Kawaguchi, Director and Managing Director
(Tokyo Office—Imperial Tower, 6th Floor, 1-1-11 Uschisaiwai-cho, Chiyoda-ku, Tokyo, Japan)
(Japanese Citizen)
Patrick J. Landers, Director and Managing Director
Bryan H.Lawrence, Director and Managing Director
J. Richard Leaman, III, Director and Managing Director
Richard R. Macek, Controller, Director and Managing Director, 120 Wall Street, New York, NY 10005
Daniel F. Marciano, Director and Managing Director
Cynthia Melcher, Director and Managing Director
Richard J. Milligan, Director and Managing Director
Richard H. Montague, Director and Managing Director
Robert Moulton-Ely, Director and Managing Director
John H. Mullin, III, Shade Tree Farmer,
Ridgeway Farm Inc. Route 2, Box 380, Brookneal, VA 24528
Christian L. Oberbeck, Director and Managing Director
Victor A. Pelson, Director
Robert A. Pilkington, Director and Managing Director
Thomas L. Piper, III, Director and Managing Director
Jerome H. Powell, Director and Managing Director
William P. Powell, Director and Managing Director
Eric W. Roberts, Director and Managing Director
Kenneth M. Schmidt, Director and Managing Director
HC. Bowen Smith, Director and Managing Director
Richard R. S. Smith, Director and Managing Director
Danforth H. Starr, Director
Jason D. Sweet, Director and Managing Director
(Dallas Office)
F. Davis Terry, Jr., Director and Managing Director
Lorenzo D. Weisman, Director and Managing Director
(French Citizen)
Edward B. Whitney, Director and Managing Director
George A. Wiegers, Director
John E. Wilson, Director and Managing Director
Robert A. Young, Director and Managing Director

[38] For a description of Barings and ING see http://en.wikipedia.org/wiki/Barings.

[39] The officers and directors of Concord Japan included:

Kenjiro Kawaguchi, Director and Managing Director Dillon Read & Co., Tokyo
Amerex SA, Coutts & Company (Bahamas) Ltd, West Bay Street, Nassau Bahamas
Takashi Imai, Nippon Steel Corporation, Tokyo
Yoh Kurosaw, The Industrial Bank of Japan, Ltd
Heiichi Hamaoka, Nissan Motor Co. Ltd, Tokyo
Gentaro Kawase, Nippon Life Insurance Company
See Exhibit D of Cornell Corrections' April 4, 1997 SEC 13-D Filing (SEC/09-0000950162-97-000313_4-04-1997_Sched13d.txt.)

[40] I was an investor in the first Lexington Fund.

[41] Personal Investments of Dillon Read Officers and Directors in Cornell Corrections in Dillon’s April 1997 13-D Filings were:

Name....Shares........Options ....Included....Amount of Funds ($)
Charles Ballard........5,870........569........5,848.82
John P. Birkelund....39,579........3,736........96,990.16
J. Robert Burton, III....2,387........228........2,448.38
James P. Connelly....697........47........2576.55
Douglas Darby........5,424........517........13,512.39
Sally Dean........2,379........228........2,425.62
Peter Flanigan........28,178........2,687........48,781.40
Felice Gelman........488........47........2,087.17
Harry Hagerty........684........70........1,498.53
John H. F. Haskell, Jr....36,730........3,505........85,382.75
E. Terri Herman (1)....368........23........1,396.40
Franklin W. Hobbs, IV....30,455........2,803........56,986.04
Robert H. Hotz........1,260........116........5,340.13
Peter H. Imhoff........8,353........853........7,500.00
Craig A. T. Jones....12,671........1,141........18,248.65
W. Howard Keenan, Jr.....5,819........548........9,274.77
Peter A. Leidel (2)....1,839........116........6,972.91
Nathan Leight........1,221........116........5,230.15
Richard H. Montague....1,291........116........5,427.55
Robert Moulton-Ely....1,002........93........4,253.93
John Murabito........367........35........1,570.06
David W. Niemiec....35,018........3,270........76,989.51
James F. Reilly........1,140........116........5,001.73
Bret Russell........5,720........569........5,425.82
Kenneth M. Schmidt....24,778........2,454........35,622.38
H. C. Bowen Smith....22,111........2,105........22,746.92
Michael I. Somers....11,929........1,137........12,223.44
F. Davis Terry, Jr.....2,460........232........10,507.61
Wayne Thornbrough....6,107........582........26,147.30
George H. Weiler, III (3)....1,103........70........4,180.11
George A. Wiegers....28,176........2,571........44,988.85
Richard C. Yancey....9,629........918........21,803.72
(1) (2) (3) Does not include 1,000 shares each purchased in the open market.

[41.5] In the October 1996 Prospectus, Dillon Read and its funds as shareholders are listed as owning 1,359,863 shares. As of the April 1997 filing, Dillon lists shareholdings of 1,191,864. The difference of 168,000 shares is assumed to be distribution of shares to partners by Concord prior to the April 1997 filing. The original cost of these shares has been estimated at $2.75 per share described by valuations in the October 1996 Prospectus (SEC/02-0000890566-97-002232_10-21-1996_Prospectus.txt).

Mapping The Real Deal is a column on Scoop supervised by Catherine Austin Fitts. Ms Fitts is the President of Solari, Inc. http://www.solari.com/. Ms. Fitts is the former Assistant Secretary of Housing-Federal Housing Commissioner during the first Bush Administration, a former managing director and member of the board of directors of Dillon Read & Co. Inc. and President of The Hamilton Securities Group, Inc.

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