Monday, November 5, 2012

Mitt Romney Profited from Failed Corrections Corporation of America Real Estate Investement Trust

In the last year there has been a lot of talk about Corrections Corporation of America forming a real estate investment trust or REIT. Corporations form REIT's to reduce or eliminate corporate tax. What has not gotten a significant amount of coverage is Corrections Corporation of America's last effort at forming a REIT.

When looking at REIT's to me it also seems like they do not necessarily serve a companies employees best interest. From what I understand REITs are required to distribute at least 90% of their taxable income into the hands of investors in the form of dividends. So basically a company dodges having to pay taxes and instead sends those untaxed dollars to stockholders and company executives with nice stock options and stock portfolios in the company. So if 90% of the profits go out this way then I would imagine that it would eventually negatively impact employees on raises and things like maintenance of CCA prisons and the funds with which say a company like CCA would put into inmate/detainee programs. 10% of profits just does not seem like much to go around to maintain or improve operations. But from a company executive standpoint having to put 90% of your profits into dividends could be quite the financial windfall.

Last time Corrections Corporation of America went this route there were lots of questionable red flags. Corrections Corporation of America's then Chairman Doctor Crant's twenty-eight year old son Robert Crants III was the founding President of Prison Reality Trust. This was the prison real estate company that merged with Corrections Corporation of America into forming the new CCA.

According to a report in "July 1997, CCA Prison Realty Trust, a REIT registered in Maryland, made an initial public offering of 21.3 million shares, priced at $21, raising more than $400 million. Most of the proceeds of the offering were used to purchase nine facilities from CCA, which leased them back and continued operating them under government contracts." The report goes on to state that the REIT was paying to CCA for the nine prisons–more than $300 million for facilitiess that had cost only $170 million to build.

 Several of the nation's largest pension funds in fact claimed that this deal favored Corrections Corporation of America executives over the companies shareholders. In the merger it is my understanding that shareholders were paid well below the market price for there shares.

From what I understand the new company then also profited off of management fees and acquisition fees for prisons that the company bought and then farmed out to Corrections Corporation of America to run. Initially CCA would pay $400 for each new prison bed and this was renegotiated retroactively to $4000 per new prison bed. My understanding is that this time period is when the Stewart Detention Center was built and that it was tied up into CCA's REIT game. If this is true it would possibly explain why the Stewart Detention Center was built without a contract for any prisoners or detainees and why it sat empty for so many years. If my calculations are right with 1,800 prison beds at a acquisition fee of a paltry $4,000 per bed then it would mean that the boondoggle of a real estate company that apparently purchased the land to build the Stewart Detention Center on may have possibly led to a acquisition fee of $7.2 million dollars for just this one prison built on speculation. Sadly from what I have heard there were many other prisons built during the same speculative prison boom that more likely than not were driven by the prison bed acquisition fee's that they generated. For a company that claims it runs prisons better than public agencies one can wonder if the Stewart Detention Center can ever really turn a profit if it in fact financially started out $7.2 million in the hole.

This whole merging of companies led to a huge debacle in which Corrections Corporations of America employees lost significant money in the companies 401K. The financial mess this merger led to almost put Corrections Corporation of America out of business and at one time CCA stock plummeted to under a dollar a share. In response to this Corrections Corporation of America had to give stockholders 1 share of stock for every 10 they held. This was done in order to prevent being de-listed from the New York Stock Exchange. Things were bad in CCA land. Ultimately in December of 1999 because of this huge financial mess Doctor Crants would get fired by Corrections Corporation of America. According to the book "Privatization of Criminal Justice: Past Present and Future" Corrections Corporation of America knew about a $80 million shortfall and neglected to let the stock holders in on this fact. the book also states that a person associated with Legg Mason Securities said "The way they disclosed the problem is very disappointing. It raises serious questions about the credibility of the management team. People are debating whether these guys are incompetent or thieves." currently has 950 pages of documents relating to Bain Capital and Mitt Romney's investments. has located some documents among those documents than link Bain Capitol and Mitt Romney to Corrections Corporation of America during this same period of time. According to there report (Mitt) "Romney bought shares in September, 1998 and sold them sometime in the first two quarters of 1999. Depending on when they were sold (and especially if they were sold before May 14th), there's a serious question about whether he had inside information and acted on it to the detriment of other investors." This story is a very interesting read and goes into even more detail about Corrections Corporation of America and it's failed REIT. allege that Mitt Romney could have made up to $80 million in profit off of the debacle that was Corrections Corporation of America's failed REIT venture. The entire story can be found here.

All opinions and allegations expressed here are just that. Please cross check anything you read before forming your own decision.