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 Reads 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.
Cornell Corrections was created to take advantage of plans to privatize the governments
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.
Did Barings, Dillons lead investor when they bankrolled
Cornell Corrections, have historical ties to the drug trade? (Logo courtesy Wikipedia)
According to a later Harvard case study on Cornells facility,
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 Cornells 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 Reads April 1997 SEC filing described
Concord and Concord II as limited partnerships organized under the laws of New York
Yoh Kurosaw, Chairman of the Industrial Bank of Japan,
seen here at the Harvard Dinner at Davos, Switzerland was a director of Concord Japan,
a Dillon venture Fund that invested in Cornell Corrections
(Photo courtesy Harvard Business School)
To understand Dillons 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 Dillons Cornell SEC filings, Dillon, Read Holding Inc.,
Dillon, Read Inc.
and Dillon, Read & Co. Inc.
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.
The presence of Barings in Dillons 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 Dillons 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
In May 1991, Dillon invested additional funds from one of the Lexington Funds.
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 Cornells 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
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.
Seven Largest Dillon Holders of Personal Positions in Cornell
||AMOUNT OF FUNDS
|JOHN P. BIRKELUND
|JOHN H. F. HASKELL, JR.
|DAVID W. NIEMIEC
|FRANKLIN W. HOBBS, IV
|GEORGE A. WIEGERS
|KENNETH M. SCHMIDT
Source: Cornell Corrections, Inc. April 1997 13-D Filing by Dillon
Note: For the full list of 32 Dillon officers with personal positions,
Total Estimated Dillon Investment in Cornell Corrections Stock
||AMOUNT OF FUNDS
|Dillon Read Officers and Directors
Source: Cornell Corrections, Inc. October 1996 Prospectus and April 1997 13-D
Filing by Dillon Read.
Dillons 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.