The U.S. Justice Department and a Texas law firm are negotiating a possible settlement in a dispute over $4.2 million in missing federal grant money Salt Lake City secured for Select Telephone Technologies Inc., an attorney said.

Salt Lake City is already suing the Dallas law firm Akin, Gump, Strauss, Hauer & Feld, charging the firm committed fraud in helping to secure a $4.2 million U.S. Department of Housing and Urban Development grant for STT.The Justice Department, in depositions taken by Salt Lake City in February 1986 in the case and obtained by the Deseret News in June, said it also is considering charging the firm, which has offices in Washington, D.C., with fraud.

The Justice Department said Wednesday it has not yet filed suit, but a Salt Lake attorney representing the law firm, one of several defendants in the case, told the Deseret News Wednesday negotiations are in progress.

"We've had some discussions with the Justice Department," said David B. Watkiss Jr., a Salt Lake attorney who represents the law firm. "We've talked about a number of issues, including the possibility of settlement."

Watkiss would not comment on whether the firm was discussing a dollar figure in the settlement negotiations. A Justice Department official also declined comment on the talks.

"We do not comment on settlement discussions," spokeswoman Amy Brown said.

But officials in the Salt Lake City attorney's office said the firm and the Justice Department were likely discussing a monetary settlement.

"I would be surprised if they were not discussing a dollar figure," said assistant city attorney Bruce Baird. "I don't believe the government is going to walk away with nothing."

City Attorney Roger Cutler says the Justice Department's involvement "brings a whole new dimension to the case," which arose when then Salt Lake Mayor Ted Wilson announced in October 1984 that STT may have misused the grant money.

The city helped STT founder Robert Gyemant, another defendant in Salt Lake City's case who has since declared bankruptcy, obtain the grant. The money was to have been repaid to the city.

But two attorneys for the firm named as defendants in the Salt Lake City case, Jack W. Hanks and Michael S. Mandel, had helped set up STT as a ghost corporation to secure the grant, the city alleges.

The two used the first 10 percent of the grant money, which was to be used almost exclusively for equipment expenditures at the telephone refurbishing company, to pay their own legal fees, the city says in their suit.

Additionally, the city charges the two knew STT didn't have the $17.5 million in private funds it needed to meet grant approval requirements and never appraised HUD or the city of STT's bleak financial condition.

In their suit, Salt Lake City is seeking a return of the $4.2 million, $10 million in punitive damages and $5 million in incidental damages.

Talks between Akin, Gump and the Justice Department mean that if an out-of-court settlement is reached, Salt Lake City will not be held responsible by HUD for loss of the grant money, Baird said.

City officials were criticized for overlooking STT's poor financial condition before helping them with the loan. There has been concern HUD may hold the city responsible for up to $3.2 million of the lost grant.

"All the city wants is to be released" from that responsibility, Baird said.

Additionally, if a settlement is not reached and the Justice Department follows through with the lawsuit they are considering, Salt Lake City will not be named as a defendant, Baird added.

Neither Watkiss or the Justice Department would comment on a deadline for the settlement talks. However, Baird said, "I expect it will be resolved in one way or another in about a month."

Wilson, now the Democratic candidate for governor, has been haunted by STT and the grant issue. Opponents have used the scandal as an attempt to portray Wilson as a poor manager.