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prison - industrial complex

Private Prisons for Dummies

The CCA & Prison Realty Trust Story

I'll provide more history as I update this page, but the current events start when CCA had spun off, then later merged into, Prison Realty Trust  - a Real Estate Investment Trust that is exempt from corporate taxes if it meets certain conditions. One important condition is that it distribute 95% of its income to shareholders, a provision making REITs attractive to investors. Prison Realty Trust failed to meet those conditions because of cash flow problems; it posted a $62 million loss for 1999 and was in default on the terms of its credit facility. 

Wall Street was unimpressed at the company's earlier scheme to issue junk bonds. Investors are angry that PZN lost its REIT status and the related dividend; they are filing class actions suits against Prison Realty for false claims on Securities and Exchange Commission documents.  Specifically, they are concerned about the non-disclosure of payments by PZN to CCA. Meanwhile, Prison Realty just paid a dividend on their preferred stock (belonging to executives and institutional partners), which sent the common stock to new lows as shareholders realized they are not likely to see dividends soon. 

In April of 2000, company audits expressed doubt about the company's solvency. Shares hit a new 52 week low of $2.12 each, down from the 52 week high of $22.37. In his book The Perpetual Prisoner Machine [see resources], Joel Dyer notes that outside one CCA facility, there is a placard with the words "Yesterday's closing stock price." imagine the legitimacy and confidence that are lost by people driving by seeing the stock price plummet, or even seeing "Yesterday's Closing Stock Price: $2.12" [Maybe CCA turns off the sign during times like this?]

Together, CCA and its spin-off Prison Realty Trust, lost $265 million: "It's a slim chance, but bankruptcy is a possibility," says an analyst for First Union Securities. Localities that have contracts with the companies are concerned about whether guards will get paid, and how morale or turnover will affect daily operations, including prison security. As it turns out, the private prison firm was offered a $200 million restructuring plan from its current shareholder Pacific Life Insurance Co. (It's unlikely that guards or inmates will receive additional benefits from the insurance company under the plan.)  The private prison's largest shareholder, Dreman Value Management, was pleased at the offer: "We always maintained that the (prison) business was great, but this has been a financial engineering disaster." 

Shareholder lawsuits still must be settled on satisfactory terms for the deal to be finalized, but the other requirement was met when Lehman Bothers refinanced PZN's $1 billion credit line. At the close of business 26 April, the price closed below $3 a share again after briefly hitting $3.50 the previous week. Prices through the first half of May have generally been below $3 a share. On June 7, the stock hit a new low of $2.00 and talks started on financial restructuring to remedy default on credit line. During the next week, stock rose $1 a share on news that their $1 billion credit line is  restructured and they receive a $780 million federal contract. 

Instrumental in puling off this contact was former Federal Bureau of Prisons head J. Michael Quinlan, who is now on the Board of PZN. He left the FBOP just as an investigation was starting on whether he silenced an inmate who claimed to have sold then vice-Presidential candidate Dan Quayle marijuana in the 1970s. The Federal contract, with guaranteed 95% occupancy rate, provided financial resources to reject a restructuring offer from Pacific Life Insurance, but a Legg-Mason stock analyst declared PZN an UNDERPERFORM. Quinlan is now one of the top executives in the company. 

Because the stock has lost 75% of its value, two of the top executives are leaving, but not without a $1.3 million severance. Of course, there's also been millions in attorney fees, class action lawsuits from shareholders about the merger and management fees for restructuring. Share prices bottomed out at $0.18 - yes, 18 cents; that really inspires confidence in the justice system. They instituted a 10 for 1 split, which does not change the underlying financials of the company, but prevented them from being removed from the New York Stock Exchange. 

The recent news has focused on CCA's recovery. The stock price is back up again because of a management turnaround and some generous contracts from federal agencies locking up immigrants. But be careful of the hype, especially all those investors looking at CCA. While the short-term chart looks good, here's the longer run perspective (runs through mid Nov 2006, adjusted for splits):

The question for anyone hoping to make money off private prisons is whether the excited stories about the prospects for private prison are for real this time or whether this is the same as the early mid 1990s hype that preceded a three year sell off? If you've never read the "risk factors" in the company's annual report, I' suggest checking it out before you invest. (link goes to 2005 annual report, but risk factors tend to be similar across years). 

Corrections Corporation Of America A Critical Look At Its First Twenty Years


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