The U.S. Justice Department is considering charging a well-known Texas law firm with offices in Washington, D.C., with fraud in a civil action linked to a $4.2 million federal grant for Select Telephone Technologies Inc.

The government's action was discussed in depositions taken in a case Salt Lake City filed in February 1986 against Jack W. Hanks, a partner in the Washington office of the Dallas law firm of Akin, Gump, Strauss, Hauer & Feld; and Michael S. Mandel, an associate of the firm, alleging they defrauded the city and the U.S. Department of Housing and Urban Development under the federal false claims act.The city alleges the attorneys helped set up a corporation that was no more than a shell, then used that shell to secure the government grant - of which the first 10 percent went to pay their own legal bills.

In its lawsuit, the city charges other conflict of interest violations, as well. Both attorneys and their law firm were investors in STT, the telephone refurbishing company they represented in order to secure the federal grant, while Hanks was at one time listed as a company officer and personally guaranteed a $525,000 loan for STT.

City Attorney Roger Cutler said he believes the strength of the city's case can stand on its own, but agreed a Justice Department suit will help the city's cause.

"They are obviously a very heavy-hitter, and they will bring a very important dimension to the lawsuit."

The STT grant fraud is an issue that continues to follow Ted Wilson, who as mayor helped the company obtain the grant and is now running a Democratic candidate for governor. Wilson's opponents have brought up the STT grant scandal during the campaign in an attempt to show Wilson is a poor manager.

"If the Justice Department does go after Akin, Gump, it begins to prove that Salt Lake City wasn't alone in being hoodwinked in some way," Wilson said.

At the taking of depositions for the Salt Lake City case, William W. Taylor, Hanks' attorney, noted that Marlene Gibbons, an attorney for the U.S. Justice Department, was in attendance. "She has advised us that the Department of Justice has under serious consideration, if it has not indeed made a determination, that it will file an action against some or all of the parties defendant in this case," Taylor said.

"There has been no secret that the city of Salt Lake City and the U.S. Department of Justice are cooperating in the sharing of information, sharing of documentation and in discussions of the facts of this case."

That the city is challenging this powerful law firm gives the case - which has been featured in articles in the National Law Journal and the Washington Legal Times - a David vs. Goliath flavor.

The Deseret News requested transcripts of depositions of Hanks and Mandel taken in April and May.

Assistant Salt Lake City Attorney Bruce Baird released the transcripts to the Deseret News only after allowing the defendants' attorneys a 10-day period to file protective orders, of which none was filed.

In 1,800 pages, the transcripts detail a complex web of failed financial deals - which weren't disclosed to city and HUD officials - in order that the grant would be approved, and the law firm would receive its payments.

In October 1984, then Mayor Wilson announced that an FBI probe was being conducted of alleged misuse of federal Urban Development Action Grant funds. The city helped STT founder, Robert Gyemant, who has now declared bankruptcy, obtain the grant. The money was to have been repaid to the city, setting up a revolving business incentive fund.

City officials were criticized for not looking at the company's financial picture more closely before disbursing the grant money, and there was concern that the federal government might hold the city liable to repay the grant.

The grant was intended to pay for STT's equipment purchases, with the money to be repaid to the city, who was to hold liens on the equipment. The city discovered problems in 1984, after $3.8 million had been disbursed, yet they held liens for only about $600,000 worth of equipment.

But the depositions indicate that both HUD and the city were kept in the dark about the bleak state of STT's financial condition.

According to the depositions, both Hanks and Mandel said that STT founder Gyemant twice paid Akin, Gump legal bills with checks that bounced. Both attorneys admitted knowing that STT was short of cash, before the grant was approved.

Approval of the grant required the company to prove it had $15 million in private funds, with at least $2.5 million of private available as working capital.

According to a 1983 memo, Hanks and Mandel bragged of their firm's "special" relationship with HUD. Mandel was a high-ranking HUD official in the Carter administration.

Hanks referred to the law firm's bargaining power over STT, saying if the firm withdrew, HUD wouldn't approve the grant. That bargaining chip of grant approval was the best way to guarantee the firm would get its payment.

In one late 1983 memo, Hanks wrote that STT's financial picture was bleak, and the company could be solvent for six months or less. "We had some problems getting our legal fees paid," Hanks testified. In the memo, he wrote: "The collection of fees in my judgment will always be difficult."

And yet two months later, according to Mandel, they drafted a memo signed by the city, saying that STT had $15 million in private funding, of which $2.5 million was in working capital.

Both lawyers admitted that in February 1984, one month before the first grant payment, they knew that STT had numerous outstanding loan obligations. The city's suit now alleges STT had six loans in default at the time, and the lawyers were aware of those.

In Mandel's opinion, it was an inappropriate to use the grant money for anything other than purchasing a plant, administrative expenses, and buying capital equipment, he testified.

But Hanks disagreed, saying the grant money could be used for operating expenses, as long the company could pay equipment bills when they came due.

According to Mandel's deposition, some of the money was used to pay back a STT loan guaranteed by Hanks and others. He testified he knew the use wasn't proper, but he didn't say anything to either city or HUD officials because Gyemant claimed to have another opinion saying such use was legal. Mandel testified he never saw or requested a copy of that opinion.

Mandel said he was repeatedly pressured by Gyemant to approve use of the grant money for the company's operating expenses and to guarantee other loans.

"I was pressed continuously. The exchange got more animated, more heated . . . I really thought I was being pressed for an opinion that I couldn't reasonably give. I recall very clearly after Rob (yemant) pressing and pressing me, finally saying in exasperation, `What do you want me to say? It is OK to use it, fine, it is OK to use it, what else do you want me to say?' I was at my wit's end."

In response to repeated questions, Hanks and Mandel both admitted they never investigated Gyemant or STT's financial statements and never verified - beyond questioning their client - the existence of a $2.5 million loan from a Hong Kong bank that was the basis of the grant approval.

Mandel testified that Gyemant had a bad track record of paying consultants, and Akin, Gump threatened to do no more work until past due bills were paid. Then an agreement was reached saying the firm's money would come out of the first grant payment.

He said there were some discussions about the legality of the payment, but he thought the firm would have a better chance of getting the money out of the city rather than Gyemant.

"You felt the devil you didn't know was better than the devil you did know?" Baird asked during the deposition. Mandel agreed it was a fair paraphrase.