American investors go stir crazy

A cautionary tale of the empty private prison in Nevada and the New Yorkers who got their fingers burnt

The scramble in the US for the rich rewards to be made out of the private prison sector is leaving a trail of individual investors feeling as if their pockets have been picked. Many prisons stand empty, with private investors holding worthless bonds - a salient warning for those on this side of the Atlantic who are advocating greater involvement by the private sector in our penal system.

The scramble in the US for the rich rewards to be made out of the private prison sector is leaving a trail of individual investors feeling as if their pockets have been picked. Many prisons stand empty, with private investors holding worthless bonds - a salient warning for those on this side of the Atlantic who are advocating greater involvement by the private sector in our penal system.

The demand for more space is far outpacing the building of new US jails, so a for-profit prison looked like a sure thing for many New York investors. But, after similar scandals in Florida and Texas, the problems of a small prison in Nevada are shaking investors' confidence and raising questions about whether profit can be made from felons.

The investors eagerly snapped up the tax-free municipal bonds in the billion-dollar rent-a-bed prison business that swept the tumbleweeds of rural America in the 1990s.

Buoyed up with the initial excitement and 90 per cent returns offered in the shady rent-a-bed prisons, Lincoln County in Nevada set to work on a plan sold it by Western Correction, an Albuquerque, New Mexico, agent that promotes the idea of private prisons. The plan had been proven, it heard, in other states, and Lincoln County was eager to jump on the prisoners-for-profit bandwagon. Building conglomerates grew up in the feeding frenzy.

Corrections Corporation of America (CCA) is developing some 82 jails with 73,000 beds in the US, the UK and Canada, and has 55 per cent of the global private prison market. But as new technology takes over real estate as the stock of choice in the high stakes poker game on Wall Street, prison privatisation is taking a drubbing. Last month CCA helped remove Robert Crant, the CEO of Prison Realty Trust (PRT) - which CCA now controls - when PRT stock dived and PRT stopped paying dividends.

Lincoln County hired a private equity company, Juran & Moody, to issue $3.5m in tax-free bonds for a 64-bed jail. Investors were offered the security of the lease of the land where the prison stood.

Prisoners could be traded for $30 to $50 each and if the experiment worked, it would be expanded using prisoners from other parts of Nevada and eventually other US states.

Charles Thomas, who developed the University of Florida's Private Prisons Project, funded by corporate donations from the private prison sector, said: "For whatever good, bad, or indifferent reason, there've been other privately financed facilities that couldn't make a go of it, and so some who've invested in [them] have lost some significant money."

In Lincoln the numbers looked great and the county paid a hefty fee in tax dollars to Juran & Moody. At $40 a prisoner the jail would turn over a $1m a year. For the small Nevada county whose population of 5,000 is scattered over 10,000 square miles, including a nuclear weapons testing range, this was a windfall - and it took the bait.

The then county commissioner Ed Wright told the town hall that the profits would go to build new sewage plants and schools. They then set about spending most of the bondholders' money paying Salt Lake City's Layton Construction, the state's top engineer, to build it.

The prison gates opened in 1994. Today, six years later, it still lies empty, the wind whistling through the razor wire, tumbleweed pinioned on the chain link fence. And in an ironic twist of fate the new county commissioner, Floyd Lamb, a former state senator who's spent time in a federal prison for blackmail, refused to send inmates and defaulted on the lease. Local Sheriff Dahl Bradfield was installed in the prison with his men but they promptly left the place empty. Bondholders were told they could have the jail back.

In private hands the prison was subject to property taxes and the bondholders still hadn't seen any return on their investment. A for-sale sign was hammered on the door. Juran & Moody liquidated itself and the remains of the bond transaction lie hidden in a trust set up before the company died.

If the sale goes through, "The bondholders would be able to offset their losses against gains they made in private equities," says Ted Brownell, a manager with the firm that acquired Juran & Moody's assets, including the prison. That's if they have any equities.

The bondholders had watched their 1992 investment shrink to nothing today. And Lincoln County is paying to house prisoners in jails across the state. "That's rural small-town politics," says a former county commissioner.

The bondholders have been given a reprieve until September to come up with back taxes before forfeiture proceedings begin.

Spring Past, a California real estate investment firm specialising in distressed properties, offered to take the facility off their hands for $500,000. That, after the initial investment, missed interest payments and back taxes, would have been 10 cents on the dollar for investors.

That offer was withdrawn when Spring Past couldn't find a private firm to operate the jail. For now, bondholders, mostly individual investors from New York, are holding paper that's never paid a penny. It seems their best hope is for the county to buy the jail. The county commission has discussed offering £500,000, if it can come up with the financing - now a mute point.

Dissatisfaction with the for-profit prison spread to neighbouring Phoenix, where the construction of a private jail was cancelled this month after the local community's protests reached federal government, which put a stop to the project.

"When it doesn't work, the core problem tends to be that the established for-profit prison sector isn't involved at all and that those who are - investment bankers, real estate developers - simply don't know much about jails," said Dr Thomas.

A point worth thinking about, perhaps, for those desperate to bring private equity into Britain's creaking prison service.