Based on company SEC filings, Houston-based Cornell Corrections started off with correctional
facilities in Massachusetts and Rhode Island in 1991 and then in 1994 acquired Eclectic
Communications, the operator of 11 pre-release facilities in California with an aggregate
design capacity of 979 beds. An important relationship for Cornell from the start
was the U.S. Marshals Service, an agency of DOJ, who was Cornells primary client
for its Donald W. Wyatt Federal Detention Facility in Central Falls, Rhode Island,
a facility with a capacity of 302 beds.
The U.S. Marshals Service is the oldest U.S. enforcement agency. Among other duties,
the U.S. Marshals Service houses and transports prisoners prior to sentencing and
provides protection for the federal court system. According to the Marshals Services
website, they are also:
Responsible for managing and disposing seized and forfeited properties
acquired by criminals through illegal activities. Under the auspices of the Department
of Justice Asset Forfeiture Program, the Marshals Service currently manages more than
$964 million worth of property, and it promptly disposes of assets seized by all DOJ
agencies. The goal of the program is to maximize the net return from seized property
and then to use the property and proceeds for law enforcement purposes.
An article by Jeff Gerth and Stephen Labaton in the New York Times in
November 1995, 'Prisons for Profit: A Special Report; Jail Business Shows Its Weaknesses"
describes the problems that Cornell ran into with its Rhode Island facility. This
facility had been financed with municipal bonds issued through the Rhode Island Port
Authority in the summer of 1992 and underwritten by Dillon Read. The article states:
Two years ago, the owners of the red cinder-block prison in this poor
mill town threw a lavish party to celebrate the prison's opening and show off its
computer monitoring system, its modern cells holding 300 beds and a newly hired cadre
"But one important element was in short supply: Federal prisoners.
W. Wyatt Facility in Rhode Island was Cornell's first facility, constructed by
Halliburton and financed by Dillon Read with tax-exempt municipal bonds issued through
the Rhode Island Port Authority and Economic Development Corporation.
(Photo courtesy Cornell Companies)
"It was more than an embarrassing detail. The new prison, the
Donald W. Wyatt Detention Facility, is run by a private company and financed by investors.
The Federal Government had agreed to pay the prison $83 a day for each prisoner it
housed. Without a full complement of inmates, it could not hope to survive.
"So the prison's financial backers began a sweeping lobbying effort to
divert inmates from other institutions. Rhode Island's political leaders pressed Vice
President Al Gore while he was visiting the state as well as top officials at the
Justice Department to send more prisoners. Facing angry bondholders and insolvency,
the company, Cornell Corrections, also turned to a lawyer who was then brokering prisoners
for privately run institutions in search of inmates.
"The lawyer, Richard Crane, has done legal work for private corrections
companies and Government penal agencies. He put the Wyatt managers in touch with North
Carolina officials. Soon afterward, 232 prisoners were moved to Rhode Island from
North Carolina, and Mr. Crane was paid an undisclosed sum by Cornell Corrections.
Cornells Donald C. Wyatt facility later became a case study at the Harvard
Design Schools Center for Design Informatics. This was an indication of the
wave of business and investment opportunities that prisons and enforcement presented
to everyone from architects to construction companies to real estate and tax-exempt
Harvards case study mentions that Cornell arranged for the facility to
be constructed by Brown & Root of Houston, Texas, then a subsidiary of Halliburton.
(Brown & Root, now known as KBR, separated from Halliburton in April 2007 after 44 years as a subsidiary.) Brown
& Root/KBR's construction of prison facilities was to become more visible many
years later after its construction of detention facilities at Guantanamo Bay, prisoner
of war camps in Iraq and its winning of contracts to build detention centers for the
Department of Homeland Security. A request to Cornell for information regarding companies
used for prison construction subsequent to the Wyatt facility has been made, but no
response has yet been received.
|Dick Cheney served as the Chairman
and CEO of Houston-based Halliburton from
1995-2000, then parent of Houston-based KBR.
Dillon Read had long standing relationships with Brown & Root and the Houston
banking and business leadership as a result of the firm's historical role in underwriting
oil and gas companies, including pipelines. In 1947, Herman and George Brown, the
founders and owners of Brown & Root, were part of a group of Texas businessmen
banked by Dillon Read as investor and underwriter (in a manner very similar to Dillon's
backing of Houston-based Cornell many years later) to form the Texas Eastern Transmission
Co. to buy the "Big Inch" and "Little Big Inch" pipelines in a
privatization by the U.S. government.
The Texas Eastern pipelines were critical to bringing natural gas from Texas and
the Southwest to Eastern markets. For most Americans, Houston and New York seem far
apart. However, the intimacy of their connection is better understood when you study
the investment syndicates that controlled the railroad, canals, pipelines and other
transportation systems that have connected these markets and helped to determine control
of the local retail businesses for both goods and capital along the way. For example,
Texas Eastern's Big Inch pipeline went from east Texas to Linden, New Jersey, some
30 miles away from the Dillon and Brady estates in New Jersey and approximately 20
miles from the Dillon Read offices on Wall Street.
According to investigative journalist Dan Briody in The Halliburton Agenda:
The Politics of Oil and Money, the Brown brothers netted $2.7 million in profits
on their shares in their initial public offering right after the company was formed
and won the bid to buy the pipelines from the government in the late 1940's. That,
however, was not the real payoff. According to Briody, Brown & Root subsequently
worked on 88 different jobs for Texas Eastern, and generated revenues of $1.3 billion
from Texas Eastern between 1947 and 1984. [42.1]
According to Robert Sobel in The Life and Times of Dillon Read,
under August Belmont's personal leadership of the transaction, Dillon Read also made
a profit on the Texas Eastern shares. "Nothing is known of Dillon Read's profits
on the underwriting, but it was a sizeable owner of TETCO [Texas Eastern] common,
acquired at 14 cents a share, which rose to $9.50." [42.2]
While figures for Dillon Read revenues from underwriting and other investment
banking services over the years comparable to Brown & Root's construction contracts
are not available, my recollection was that Dillon continued to maintain a profitable
relationship with Texas Eastern when I worked at the firm in the 1980s many decades
later. Interestingly enough, Briody also describes in detail the McCarthyist efforts
that were made to destroy Federal Power Commission chairman Leland Olds, an honest
government official, because his ethical regulatory decisions threatened the richness
of the Texas Eastern profits. The clear implication is that the pattern of generating
financial windfalls from government privatizations combined with dirty tricks against
honest government officials is nothing new. [42.3]
The closeness of the Brown & Root relationship with Dillon Read is also underscored
by Briody's description of the head of Brown & Root’s frustration with Lyndon
Johnson's decision to serve as John Kennedy's running mate. He quotes August Belmont,
by then a leader of Dillon Read, who was with Brown in Houston in his private hotel
suite listening to the radio coverage of Johnson's announcement. According to Belmont,
"Herman Brown....jumped up from his seat and said, 'Who told him he could do
that?' and ran out of the room." [42.4]
What Briody does not mention is allegations regarding Brown & Root's involvement
in narcotics trafficking. Former LAPD narcotics investigator Mike Ruppert once described
his break up with fiance Teddy an agent dealing narcotics and weapons for the
CIA while working with Brown & Root, as follows:
Arriving in New Orleans in early July, 1977 I found
her living in an apartment across the river in Gretna. Equipped with scrambler phones,
night vision devices and working from sealed communiqués delivered by naval
and air force personnel from nearby Belle Chasse Naval Air Station, Teddy was involved
in something truly ugly. She was arranging for large quantities of weapons to be loaded
onto ships leaving for Iran. At the same time she was working with Mafia associates
of New Orleans Mafia boss Carlos Marcello to coordinate the movement of service boats
that were bringing large quantities of heroin into the city. The boats arrived at
Marcello controlled docks, unmolested by even the New Orleans police she introduced
me to, along with divers, military men, former Green Berets and CIA personnel.
The service boats were retrieving the heroin from oil rigs in the Gulf of
Mexico, oil rigs in international waters, oil rigs built and serviced by Brown and
Root. The guns that Teddy monitored, apparently Vietnam era surplus AK 47s and M16s,
were being loaded onto ships also owned or leased by Brown and Root. And more than
once during the eight days I spent in New Orleans I met and ate at restaurants with
Brown and Root employees who were boarding those ships and leaving for Iran within
days. Once, while leaving a bar and apparently having asked the wrong question, I
was shot at in an attempt to scare me off.
Source: "Halliburton’s Brown and Root is One of the
Major Components of the Bush-Cheney Drug Empire" by Michael Ruppert, From
Another important relationship for the Houston-based Cornell Corrections was the
California Department of Corrections. Whether this reflected that California was home
base for David Cornells former employer, Bechtel, is not clear. When Cornell
Corrections got started, California had the largest prison population of any U.S.
governmental entity. In part due to extraordinary growth in incarcerations of non-violent
drug users as a result of the War on Drugs, the federal prison population managed
by the Federal Bureau of Prisons at the Department of Justice has become the largest
with 186,560 based on their September 8, 2005 weekly update.
California is close behind with 168,000 youths and adults incarcerated in California
prisons and 116,000 subject to parole.
early years of business were not financially profitable. The private prison industry
faced significant resistance and legal and operational challenges to privatizing federal,
state and local prison capacity. Within the private prison industry, Cornell faced
competition for new contracts and acquisitions from two larger, more experienced companies,
CCA and Wackenhut. By 1995, compared to industry leaders, Florida-based Wackenhut
and Tennessee based Corrections Corporation of America (CCA), Cornell Corrections
appeared to be lagging in government contract growth. As of mid 1996, Cornell was
carrying $8 million of cumulative losses on its balance sheet.
Cornells Chief Financial Officer, Treasurer and Secretary was Steven W. Logan,
who had served as an experienced manager in Arthur Andersons Houston office.
This was the same office of Arthur Anderson that had served as Enrons auditor
until the Enron bankruptcy brought about the indictment and conviction of Arthur Andersen.
Arthur Andersen was Cornells auditor, having first served as a consultant to
create market studies which helped support the approvals for and financing of the
building of the Rhode Island facility for the U.S. Marshals Service. Logan was later
forced out of Cornell after an off-balance sheet dealengineered
with the help of a former Dillon Read banker Joseph H. Torrence, like those done for
Enron was called into question and significant stock value declines triggered litigation
Cornells Reported Revenues and Net Income for 1992-1996
|Net Income (Loss)
|Beds in Operation
(MM = In millions)
Source: Cornell Corrections, Inc., Selected Consolidated Financial Data, Form 10-K
For Fiscal Year Ended 1996
Most venture capital investors prefer to exit their investment within 5 years. That
means that Dillon Read would have likely wanted to establish or start their exit from
Cornell by 1996. The stock market was hungry for Initial Pubic Offerings (IPOs) where
a new company sells its stock to the public for the first time. Venture capitalists
typically make their profit from financing a company and then selling their equity
when a public market has been established for the companys stock. However, by
the end of 1995, Cornells story was not an exciting one. It was not a market
leader, its growth was slow and it had no profits. If the calf was going to be taken
to market, it would need fattening.
A Note on Prison Pop
The pop is a word I learned on Wall Street to describe the multiple
of income at which a stock is valued by the stock market. So if a stock like Cornell
Corrections trades at 15 times its income, that means for every $1 million of net
income it makes, it's stock goes up $15 million. The company may make $1 million,
but its pop is $15 million. Folks make money in the stock market from
the stock going up. On Wall Street, it's all about pop.
Prison stocks also are valued on a per bed basis which is based
on the number of beds provided and the profit per bed. Per bed is really
a euphemism for people who are sentenced to be housed in their prison.
For example, in 1996, when Cornell went public, based on the financial information
provided in the offering document provided to investors, its stock was valued at $24,241
per bed. This means that for every contract Cornell got to house one prisoner, at
that time, their stock went up in value by an average of $24,261. According to prevailing
business school philosophy, this is the stock markets current present value
of the future flow of profit flows generated through the management of each prisoner.
This, for example, is why longer mandatory sentences are worth so much to private
prison stocks. A prisoner in jail for twenty years has a twenty-year cash flow associated
with his incarceration, as opposed to one with a shorter sentence or one eligible
for an early parole.
This means that we have created a significant number of private interests
investment firms, banks, attorneys, auditors, architects, construction firms,
real estate developers, bankers, academics, investors among them who have a
vested interest in increasing the prison population and keeping people behind bars
as long as possible.
When you invest in stock, you make money if and when you sell the stock at a higher
price than you paid for it. This would be true for the people who invested in Cornell
stock, including Dillon Read and its venture funds. Cornell was run by a board of
directors that represented the shareholders, particularly the controlling shareholders
in this case Dillon Read. The board is the group of people who decides what
goes. Senior management officials, such as the founder and Chairman David Cornell,
who run the company day to day, are also on the board. Most of the money they make
comes from stock options that they get to encourage them to get the stock to go up
for the investors. That means that what everyone who runs the company wants is for
the stock to go up.
There are two ways to make the stock go up. First, you can increase net income
by increasing capacity the number of beds or profitability
profits per bed. Second, you can increase the multiple at which
the stock trades by increasing the markets expectations of how many beds or
what your profit per bed will be and by being very accessible to the widest group
of investors. So, for example, passing laws regarding mandatory sentencing or other
rules that will increase the needs for prison capacity can increase the value of private
prison company stock without those companies getting additional contracts or business.
The passage of or anticipation of a law that will increase the demand
for private prisons is a stock play in and of itself.
The winner in the global corporate game is the guy who has the most income running
through the highest multiple stocks. He is the winning pop player. Like
the guy who wins at monopoly because he buys up all the properties on the board, he
can buy up the other companies. So the private prison company that wins is the one
that gets the most contracts that guarantee it the most prisons and prisoners that
generate the most income for the longest period with the smallest amount of risk.
The way that Cornell could become a winner quickly was to get lots of government
contracts to house lots of prisoners and acquire other companies with government contracts
to house lots of prisoners and do it quickly.
And that was exactly what happened.