Justin Elliott March 31, 2010, 1:25 PM

Mike Ormsby, President Obama’s nominee to be U.S. Attorney in eastern Washington state, is being called unfit for the job by critics of his role in a 1990s bond deal that ultimately resulted in Ormsby’s firm paying $1.4 million to the IRS.

Ormsby’s critics, who include the former mayor of Spokane, sent a letter to President Obama and Senate leaders about a year ago when Ormsby’s name was first floated for the job. Now, with Ormsby’s formal nomination earlier this month, the issue is surfacing again.

“At a time when it’s vital that the Justice Department send a message that it will not tolerate private fraud and public corruption, Mr. Ormsby’s appointment would send the opposite message,” says the letter, signed by former Spokane Mayor John Talbott and three others.

The case involves complex issues surrounding the public-private development of the River Park Square mall complex, which opened in 1999 along the Spokane River in the city’s struggling downtown.

Ormsby, a partner at K&L Gates, the large national law firm, represented the Spokane Downtown Foundation, a nonprofit set up by the developers to buy the mall project’s parking garage. The development companies on the project were owned by a powerful local family that also publishes Spokane’s Spokesman-Review newspaper and owns several TV stations.

The Spokane Downtown Foundation sold $31 million in what were called tax-exempt bonds — the status of which were later challenged. The money was used to buy the garage from the developers.

The Spokesman Review in an article last year outlined the criticisms of the project and Ormsby’s role:

Critics of the project said the price of the garage was improperly inflated by an unusual appraisal method, and the IRS later challenged the tax-exempt status of the bonds because of the way the mall deal was structured.

Investors who bought the bonds eventually sued the city, the development companies, the foundation, Ormsby’s firm and others connected with the project for fraud. The suit was settled out of court, with the city buying up the outstanding bonds from investors and reaching settlements with most of its other co-defendants. Ormsby’s law firm eventually settled a complaint with the IRS that he and another attorney did not perform the “due diligence” necessary on the project before bonds were sold to investors.

The IRS Office of Professional Responsibility announced in late 2007 that it reached a settlement with Ormsby and another attorney over allegations they had not performed sufficient due diligence. The attorneys did not admit to wrongdoing. According to the Spokesman-Review, Ormsby’s firm also “paid $1.4 million in fees and taxes assessed by the IRS as part of its settlement with the city.”

Ormsby and the office of Sen. Patty Murray (D-WA), which recommended him for the job, did not immediately respond to requests for comment.

But, in response to his critics, Ormsby told the Spokesman-Review earlier this month:

“The project happened and it’s now behind us. I guess I’ve let it go and tried not to think about it much. I understand that people develop very, very strong feelings about an issue. I may not agree with them, but I certainly respect … the vehemence in the way they hold their views and their rights to express their views.”

Barack Obama, IRS, K&L Gates, Mike Ormsby, Patty Murray, Spokane, Washington, U.S. Attorneys