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Adam Fondren, Deseret News
Terry Diehl, walks out of the federal courthouse in Salt Lake City on Monday, Nov. 6, 2017. Prosecutors abruptly dropped what remained of their watered down case against the former Utah Transit Authority board member, telling a judge Monday that his decision last week precluding certain evidence “gutted” the government’s case.

SALT LAKE CITY — Federal prosecutors abruptly dropped what remained of their watered down criminal charges against former Utah Transit Authority board member Terry Diehl, telling a judge Monday that his decision precluding key evidence “gutted” the government’s case.

“That order flipped the United States’ case on its head from a reasonable likelihood of success to a reasonable likelihood of failure,” assistant U.S. attorney Mark Hirata told U.S. District Judge Clark Waddoups.

Hirata said the limitation "unfairly" prejudiced the government to the point that it couldn't go forward. Diehl, a prominent Utah real estate developer, was scheduled to go on trial Monday.

Waddoups promptly dismissed the sole remaining charge of making a false declaration in a bankruptcy filing. Prosecutors cannot refile the case because a jury was already impaneled.

"I feel good today," Diehl told reporters outside the federal courthouse. "It's a good day today."

The government in April charged Diehl with five counts of filing a false declaration and seven counts of concealing assets in connection with his Chapter 11 bankruptcy reorganization in 2012, and later added tax evasion and filing a false tax return.

But over the past few weeks, prosecutors whittled down the indictment to a single charge of making a false declaration, saying Waddoups' pretrial rulings caused them to "refine" and "narrow" the case.

Dave Backman, the criminal division chief of the U.S Attorney's Office, admitted Monday that prosecutors made errors that led them to drop charges.

"It was also based on mistakes by our prosecution team and we owned up to those. When we make mistakes in a criminal case, we try to do the right thing and dismiss those charges as soon as possible, and that's what we did. We wish we had done things differently, but that was the reality," he said.

Diehl's attorney, Loren Washburn, said the dismissal is a "great relief" to Diehl and his family.

“Terry Diehl has been waiting for justice for over two years during the investigation and prosecution of the government’s unfounded charges," he said in a statement. "He looks forward to reclaiming his good name and moving forward with the next chapter of his life."

The remaining false declaration charge, filed in an amended indictment just last Wednesday, alleged Diehl failed to list a company called Skyline Ventures Associates Inc. in his April 13, 2012, bankruptcy filing for debt totaling $41.7 million, including $500,000 owed the MGM Grand in Las Vegas.

Diehl set up Skyline Ventures several months before he filed for bankruptcy in the names of his two daughters, but "exclusively" managed and controlled its financial transactions, prosecutors alleged.

Prosecutors alleged Diehl omitted more than $1 million in income stemming from the sale of land to eBay adjacent to the UTA FrontRunner transit-oriented development in Draper.

Backman said prosecutors believed that in not disclosing Skyline Ventures, Diehl was able to "game the bankruptcy system and he could continue to live large without the bankruptcy trustee or creditors knowing about that."

The government, however, dropped that allegation from the last indictment against Diehl.

In response to a defense motion last week, Waddoups precluded prosecutors from discussing any evidence related to what became of the $1 million. The judge, however, had not ruled on whether it could be introduced later in the scheduled two-week trial.

"At the last minute on Friday, the court decided that it would not allow us to present any evidence about the most important part of our case during this first day of trial. That put us in an impossible position," Backman said.

Washburn told the judge that the government was trying to prosecute Diehl, who faced up to five years in prison, on charges it had dropped, not the one that remained.

"This trial is going to be about everything they didn’t charge," he said, urging the judge to dismiss the case.

U.S. Attorney for Utah John Huber said in a statement that prosecutors have "no viable option" to appeal Waddoups' rulings made before the trial.

"We are disappointed this matter could not be presented to a jury of Mr. Diehl’s peers for a full consideration of the entirety of the evidence obtained during our investigation," said Eric Barnhart, FBI special agent in charge in Salt Lake City.

The U.S. Attorney's Office filed the indictment against Diehl last April, a day after announcing in a press conference an agreement not to prosecute UTA itself for any possible wrongdoing. Diehl resigned from the transit authority board under fire in 2011 over the Draper FrontRunner station project.

Federal officials hinted at the time that there would be more to come. But Backman declined Monday to discuss any ongoing investigation related to UTA or Diehl.

Diehl of Salt Lake City, was no stranger to controversy during his time on the UTA board and with some of his real estate projects, including the Tavaci housing development at the mouth Big Cottonwood Canyon.

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In 2008, Diehl consulted for and later held ownership in development company Whitewater VII, which wanted to develop land next to the proposed FrontRunner stop at 12800 South.

While he was on the UTA board, Diehl sold the development rights to land near what is now the Draper station to another developer, Jeff Vitek. According to documents released in 2011, Diehl made millions of dollars but less than $24 million on the deal.

Legislative auditors in 2011 found that Diehl had a conflict of interest when he profited from the sale of the land for the Draper station.