Too Good To Be True?

When companies approach -- but don't cross -- the legal line.



"Then you take it a step further and you already have contracts, and it's like a no-lose. It's like people are mandated to have to use your services. So it drives the stock prices up."

 

Thus did FBI undercover agent L.C. McNeil explain the road to success for his phony company, E-Cycle Management, to Barry Myers, bagman for former Tennessee state senator Roscoe Dixon. The rest, as they say, is history. Dixon authored legislation favorable to E-Cycle; Dixon and Myers were indicted along with senators John Ford, Ward Crutchfield, and Kathryn Bowers; Myers testified against Dixon, and Dixon was convicted in the ongoing Operation Tennessee Waltz investigation of public corruption.

For a sting to work, it must first be credible.

That's the bottom line on Tennessee Waltz and E-Cycle Management. It wasn't just the business cards, the Web site, the yacht in Miami, and the heady talk about "no-lose" propositions and the millions made in California dot-com companies that gained the interest and eventually the trust of local lawmakers. It was the similarities between E-Cycle and real-life Tennessee companies such as Corrections Corporation of America (CCA).

Corrections Corporation of America operates prisons for profit in 19 states including Tennessee and has 69,000 beds in 63 facilities. The company was founded in Nashville in 1983 and became a publicly traded NASDAQ company in 1986, moving to the New York Stock Exchange (symbol CXW) in 1994.

Over the last five years, it has been a fantastic investment. A $100 investment on December 31, 2000, had grown to $1,308 by December 31, 2005. During that time, the Standard & Poor's 500 Index grew to $102, while CCA's peer group of prison companies (Avalon Correctional Services, Cornell Companies, and Geo Group) grew to $264. John Ferguson, a former Germantown banker and Tennessee commissioner of finance from 1996 to 2000, is the chief executive officer. He earned $2,082,490 in 2005 and owns 959,336 shares of stock, worth approximately $60 million at CCA's recent stock price.

Since its inception, few companies have exploited political connections so successfully en route to becoming successful public companies. Founder Tom Beasley was chairman of the Tennessee Republican Party during former Gov. Lamar Alexander's first term and was later a partner with former Gov. Don Sundquist in the Red Hot & Blue barbecue franchise. For several years, CCA's chief lobbyist was Betty Anderson, married to House Speaker Jimmy Naifeh. CCA's vice presidents of government relations, health services, local government customer relations, and state customer relations have all been former state employees.

The key to CCA's success is getting and keeping government contracts to run prisons. Its first contract in 1983 was with the federal government's Immigration and Naturalization Service for a prison in Houston, Texas. In its early years, CCA also won contracts to operate two facilities for juveniles in Memphis, Tall Trees and Shelby Training Center. CCA's financial history has been one of boom, bust, and boom again. It nearly went bankrupt in 2000 when its CEO, Doctor Crants, was replaced by Ferguson. The stock price had fallen so low that CCA did a reverse 1-10 stock split (shareholders got one share for every 10 they owned), and the stock recovered. In August 2006 it was trading at over $60 a share.

The history of CCA and its key players were well known to Dixon, Ford, Crutchfield, and every lawmaker who served in the Tennessee legislature in the 1980s and 1990s. The company was regularly in the news when Alexander ran for president in 1996 and when the stock price soared and crashed. Myers mentions it on at least one of the secretly recorded tapes played at Dixon's trial.

Although there were rumors of federal investigations of CCA in the 1990s, no one was indicted before or after the reorganization in 2000, and the company, as it states in its official filings, operates ethically. It is a model of privatization of once-public functions and using political connections for financial gain without crossing the legal line. Its lessons were learned, but not well enough, by the lawmakers dazzled by the siren song of the FBI and E-Cycle Management and indicted in 2005 in Operation Tennessee Waltz. 

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