If a settlement currently being negotiated is reached, Salt Lake City may recoup $2.5 million from defendants in the city's $4.5 million Select Telephone Technologies fraud suit, sources said Wednesday.

A Salt Lake attorney was in Washington, D.C., discussing settlement terms with the U.S. Justice Department and defendants, including a major Texas law firm, in the two-year-old suit, City Attorney Roger Cutler confirmed.The city is suing the Dallas firm Akin, Gump, Strauss, Hauer & Feld, accusing the firm and a dozen other defendants of defrauding the city out of a $4.5 million U.S. Department of Housing and Urban Development grant in 1984.

The Justice Department has been negotiating an out-of-court financial settlement with the law firm and other defendants in lieu of suing the defendants in U.S. District Court along with Salt Lake City.

Assistant City Attorney Bruce Baird flew to Washington Tuesday to discuss the settlement, Cutler confirmed. Cutler would not comment on the possibility the city could come away from the talks $2.5 million richer.

But a source told the Deseret News the city may be able to keep the HUD money, despite the fact that in 1985 HUD said Salt Lake City owed it $3.5 million of the lost Urban Development Action Grant.

City Finance Director Lance Bateman said a financial agreement between the government and defendants has been reached, but whether the city can keep the money is not a certainty.

However, any returned money would have to be treated as if it were another UDAG grant used for specific purposes and could not be used in the city's general fund, Bateman said.

"Since we can't use it for the general fund, the area where we're really hurting, it would not really help our fiscal condition unless we can use it for some economic development areas," he said.

For that reason, the city sent Capital Planning Director Rosemary Davis to Washington with Baird, Bateman said. Davis will talk to federal officials about applying to use the money for economic development projects, Bateman said.

Two parking projects could benefit from any returned money, he said, listing proposals to build office towers on the corner of Second South and Main Streets on Block 57 and on the site of the Centre Theatre at Third South and State Streets as possible beneficiaries of the parking projects.

Under the grant's original guidelines, the city would have been reimbursed by Select and its founder, Robert Gyemant, also a defendant in the suit who has since declared bankruptcy, after the grant was used to get the business off the ground.

Cutler would not comment on specific items discussed in the negotiations, saying too much publicity "could jeopardize the discussions." He did say, however, "I think we're moving closer together than farther apart" in the talks.

"We've had several false starts and stops on this issue," he added, "until you get all the t's crossed and i's dotted, all sorts of things can happen."

David B. Watkiss Jr., a Salt Lake attorney who represents Akin, Gump, would not comment on the negotiations.

Select went bankrupt in 1984, taking with it the $4.5 million grant the city obtained from HUD. In 1986, after HUD demanded it be compensated for the loss, the city filed suit against Akin, Gump and 12 other defendants.

The Hong Kong Bank, Gyemant and Akin, Gump, which touts former Democratic National Committee Chairman Peter Strauss as a member, were among those named in the suit filed in U.S. District Court.

Salt Lake attorneys originally charged the defendants with fraud and racketeering, among other things, but in the fall of 1987, the court threw out the racketeering charges.

The city contends the law firm and two of its members, Michael S. Mandel and Jack W. Hanks, as well as other defendants, knew that Select was in financially dire straits but led the city to believe otherwise and persuaded officials to secure the loan.

City officials were criticized for being led astray by Select and its associates, and opponents of gubernatorial candidate Ted Wilson, Salt Lake City mayor at the time the grant was made, have used the Select scandal as campaign ammunition.

Wilson called progress in the settlement "political good news" and added, "It's also good news for the people of the city."

As for criticism by opponents that Wilson was responsible for the Select debacle, Wilson said they now "look ridiculous" in light of Justice Department intervention and the settlement.

Once the company, which the city says was simply a shell, obtained the grant, 10 percent of the money was used to pay the firm's legal fees, the city contends.