Water hustle

 

At the time of the arrests, the Southwest was undergoing a profound transformation. The Colorado River had suffered more than a decade of grinding drought. Lake Mead, the major reservoir for Las Vegas, was leaving bathtub rings as it emptied, and local water bosses were desperately searching for more water.

That urgency brought in a flood of new money — and with it, new opportunities for graft. Prosecutors allege that Johnson and Coache received $1.3 million in kickbacks on a sale of water rights to the Southern Nevada Water Authority, the powerful water supplier to the city’s nearly 2 million people. The two men were hit with a 51-count indictment that includes charges of extortion, bribery, money laundering and misconduct of a public officer.

This coming April, nearly five years after their arrests, the two men will finally face a jury. But already, the details of the case — gleaned from more than 8,000 pages of legal filings — provide a detailed look into what may have been one of the biggest attempted water swindles in the West’s recent history.

In the West, the world of water has long been a clannish brotherhood whose inner workings are known to few, largely hidden from public view and flush with money. Johnson worked for a relatively small water district, but Coache was in an entirely different class. A guilty verdict against him would mean that, while serving as a top-level state water regulator, he was simultaneously conspiring to speculate in water rights and profit from a devastating drought.

 

VALUABLE CONNECTIONS
The Virgin River rises near Zion National Park in southwest Utah and wanders through the blazing desert of northwest Arizona and southern Nevada before draining into the Colorado River at Lake Mead. In 1987, a local businessman named John Lonetti — who ran a modest empire that included several souvenir shops, a supermarket, an Italian restaurant and a lodge near Zion — bought a small farm some 65 miles east of Las Vegas along the Virgin.

Lonetti’s farm came with long-established water rights, but he wanted more. So, in 1990, he filed an application with Nevada’s statewide water regulator, the office of the state engineer, for additional Virgin River water, ostensibly to expand an ostrich-farming operation. For the next 16 years, the application languished, apparently forgotten.

Then, in 2006, Lonetti received notice that the state engineer’s office intended to cancel his application. By then, Vegas’ supplier, the Southern Nevada Water Authority, had received rights to the majority of the water in the Virgin River, and the state engineer believed the river to be fully appropriated — meaning that no water was available for Lonetti. That’s when Lonetti turned to Michael Johnson for help.

Johnson, who sometimes goes by the nickname Boomer, was a mud-on-his-boots hydrologist with a self-described “drilling addiction.” Originally from South Dakota, married and with two grown children, Johnson lived in Las Vegas but commuted to the small town of Mesquite, some 75 miles to the east on the Utah state line. His day job was as chief hydrologist of the small Virgin Valley Water District, which meant he had considerable say in the district’s water rights decisions. But Johnson also moonlighted as a water consultant. And, prosecutors allege, he had important connections. “If anybody could help me get the water right,” Lonetti would later tell them, “I was certain Michael Johnson could do it.”

Johnson did not respond to requests to be interviewed for this story. But in sworn testimony, he has acknowledged that he helped Lonetti draft a letter to the state engineer, arguing that the application should be approved. Lonetti, Johnson wrote, needed the water to irrigate 400 acres of farmland. Moreover, he continued, there was still water available in the river: the unused water allocated to Vegas.

The Southern Nevada Water Authority had tied up 190,000 acre-feet of water, roughly 62 billion gallons, Johnson wrote, “speculating as to future use and making no attempt to develop the water.” On March 7, 2006, Lonetti faxed the letter to the Las Vegas branch of the state engineer’s office — the office supervised by Bob Coache. Prosecutors allege that this was the beginning of a hustle that would eventually land all three men in court.

THE BIG SWAP
For reasons that are still unclear, and that lie at the crux of the upcoming trial, the state engineer’s office quickly reversed its intent to deny Lonetti’s application. More than a year would pass before the permit was formally issued, yet even before Lonetti had the water right in hand — and despite his claim that he needed it for his farm — he began looking for a buyer.

One proposed deal with a housing developer fell through. But there was another, much bigger, prospect: The Southern Nevada Water Authority. The agency faced dwindling reservoirs but, thanks to the housing bubble, it was awash in cash. The Water Authority had recently spent nearly $80 million buying big ranches with water rights in northern Nevada, and it was looking for more.

And “everybody knew,” Johnson would later testify, “who had the deepest pockets in southern Nevada.”

About that same time, an important change occurred on the Virgin River. For decades, arcane interstate legal disagreements had prevented the Authority from legally taking any water from the Virgin. But in late 2007, an agreement backed by then-Interior Secretary Dirk Kempthorne ended that prohibition. 

Which is where Michael Johnson came in. Johnson was a familiar face to managers at the Authority; he had worked there for more than six years during the 1990s, before moving to the Virgin Valley Water District. Once the Virgin River opened up to Vegas, Johnson would later testify, he talked with Authority executives about buying Lonetti’s Virgin River water rights, which had just become very valuable. In January 2008, Johnson met with top Authority managers and was soon negotiating the sale of two water rights with John Entsminger, the attorney who now runs the agency.

Water bosses tend to prize one attribute of a water right above all else: its vintage, or “priority date.” Typically, the older a water right, the more coveted it is, because it takes priority over so-called junior rights during drought. And while the 2007 agreement finally allowed the Southern Nevada Water Authority to take water from the Virgin River, the Authority could still only use water with a priority date earlier than 1929.

Lonetti’s older water right had originally been filed by S.W. Darling, a mine superintendent and county commissioner, back in 1914. That made it one of the oldest, and therefore most reliable and valuable, rights on the Virgin. But Lonetti’s newly approved water permit — the one Johnson helped him argue for — carried a priority date of only 1990, the year Lonetti originally applied for it. To the Water Authority, a recent-vintage water right like that was basically useless.

So Johnson allegedly proposed a swap. The Authority could buy the 1990 water right but not use it. Then Johnson’s employer, the Virgin Valley Water District, would take that water in exchange for some of its own higher-value, pre-1929 water. From Virgin Valley’s point of view, it would essentially mean trading a smaller block of relatively more-reliable water for a bigger block of less-reliable water — and giving the Authority access to a source of water it otherwise would have been unable to touch.

Entsminger readily agreed to the proposal. But Johnson apparently neglected to mention that he was negotiating not for the Virgin Valley Water District, but rather as Lonetti’s agent. “I definitely thought he was acting on behalf of the Virgin Valley Water District,” Entsminger later testified.

After meeting with Entsminger, Johnson returned to Mesquite. On March 18, 2008, he and Mike Winters, Virgin Valley’s general manager, convinced the district’s board members to approve the trade. The heart of Johnson and Winter’s pitch to the board, one board member would later say in a deposition, was that “we were going to get a whole bunch more water than what we were going to give (Southern Nevada Water Authority), I mean, a huge amount.”

On May 20, the Authority wired $8.4 million to Lonetti for the water. Lonetti had hit the jackpot. The Southern Nevada Water Authority paid him $5.2 million for the older, S.W. Darling water right that had originally come with his farm. But the sale of the 1990 water permit was the real bonanza. Lonetti had paid just $2,750 in fees to the state engineer’s office for that permit. Less than a year after it was finally approved, he flipped it to the Authority for more than $3.2 million.

 

BRING IN THE LAW
It soon became clear that there was much more to the transaction than first appeared. Early in 2010, rumors began circulating that Johnson had a vested interest in the deal. That February, based on allegations of improper conduct related to other issues, Virgin Valley’s board fired Winters, the general manager. In August, following an internal investigation, several board members confronted Johnson with similar allegations of misconduct — specifically of taking a kickback for the Lonetti water deal. Johnson resigned on the spot.

Two months later, Virgin Valley’s general manager, attorney and two board members met with the Clark County district attorney. They accused Johnson of deceiving the board into trading valuable water rights to the Authority for millions of dollars less than they were worth, and tricking the board into overpaying at least $2.9 million for another water right that Lonetti sold in 2005.

Because of the statute of limitations, the district attorney’s office couldn’t bring criminal charges related to the 2005 deal. Instead, the DA focused on the 2008 deal — the one in which Johnson helped Lonetti sell his water to the Authority, which it then traded to Virgin Valley. 

The job of investigating the case fell to Las Vegas police detective Nate Chio, a then-38-year-old Philippines-born specialist in organized crime and public corruption, and a police financial analyst named Colin Haynes. The two men soon uncovered an agreement in which Lonetti had granted a 10 percent interest in the 1914 water right and a 25 percent interest in the 1990 water right to a limited liability company called Rio Virgin — which was represented by Michael Johnson.

When Chio and Haynes subpoenaed bank records, they learned that the day after Lonetti received the $8.4 million from the Authority, he deposited more than $1.3 million into Rio Virgin’s Wells Fargo account. And Johnson, it turned out, wasn’t the only authorized signer on the account. The other was Bob Coache, the state water regulator.

 “We were going to get  a whole bunch more water than what we were going to give (Southern Nevada Water Authority), I mean, a huge amount.”

A SETTLEMENT, AND A NEW CASE
Coache was a Las Vegas native who had started working for the state engineer’s office in 1981. He became deputy state engineer for Southern Nevada in 2006. That made him the top regulator in the region, and gave him responsibility for recommending approval or denial of water rights applications. Coache held the position until he retired in April 2010, two-and-a-half years after Rio Virgin was formed and about a year before he was arrested.

Coache and Johnson were the sole beneficiaries of Rio Virgin, but neither man’s name appears anywhere on the company’s corporate filings with the Nevada secretary of State. That’s because Coache enlisted a friend named Rick Templeton to act as the company’s registered agent.

“Rio Virgin LLC appears that it was pretty much created as a shell company,” Chio said in a deposition. “Its whole purpose was to take this money, the $1.3 million from Lonetti, and disguise that it was going to Johnson and Coache.”

Chio interviewed Templeton on May 5, 2010, just days before Coache and Johnson were arrested. During that interview, Chio would later tell a grand jury, Templeton said that Rio Virgin was created “for water speculation, which is basically buying water rights and trying to flip them for a profit.”

Four days later, Chio interviewed Templeton again. He learned that Templeton — despite being explicitly instructed not to do so — told Coache that the detective had come calling. And this time, Templeton told Chio a different story: Rio Virgin had been created not for water speculation but for “commercial and retail development.” (When the SWAT team finally located and arrested Coache later that day, he was at Templeton’s house.)

Prosecutors assert that Coache received $600,000 of the alleged kickback, while Johnson took the remaining $727,500. The two men subsequently used most of the money to purchase three houses in Las Vegas and invest in a Texas oil and gas company. Coache allegedly gave $48,000 to his sister. Johnson also wrote a $15,000 check to Mike Winters, his boss, allegedly as compensation for his help in convincing the board to agree to swap water with the Authority. (Johnson says it was a loan to Winters.) Prosecutors also allege that Johnson and Coache used roughly $202,000 to pay federal taxes, in an attempt to launder the kickback by disguising it as a real estate transaction.

Johnson has admitted that when he recommended that Virgin Valley approve the swap with the Authority, he did not disclose his personal financial interest in the deal. When he was asked, under oath, why not, Johnson simply replied: “Nobody asked.”

In an effort to recover the money Virgin Valley claims it lost through the swap, as well as through its 2005 purchase of groundwater from Lonetti, the district filed a separate civil lawsuit against Johnson, Winters, Coache and Lonetti in 2011. The criminal case was put on hold until the civil case was resolved. (The DA had elected not to bring charges against Lonetti in the criminal case, and while Winters was initially named in that case, the DA later dropped its criminal charges against him.)

Last year, the four defendants agreed to settle the civil case, though neither Coache nor Winters admitted guilt. Johnson agreed to pay back the money he made from the transactions. Lonetti agreed to buy back most of his water rights. And Winters paid the Virgin Valley Water District the $15,000 he received from Johnson. If the DA’s office wins its criminal case against Coache, Virgin Valley will receive the $600,000 in assets Coache purchased with his alleged cut from the deal.

 

WHO KNEW WHAT, AND WHEN
With the civil case finished, the DA’s office can finally move forward in its bid for criminal convictions of Coache and Johnson. Hearings against them are scheduled to begin on April 18 in Clark County District Court in downtown Las Vegas. Marc DiGiacomo, the chief deputy district attorney in charge of the case, won’t comment before it goes to trial. But given Coache’s high-level position, the trial is likely to center on one key question: What role — if any — did Coache have in ensuring that Lonetti’s 1990 water application was approved?

The permit wasn’t issued until the summer of 2007. But it was apparently approved sometime between March 7, 2006, when Johnson and Lonetti sent their appeal to the state engineer, and July 21 of that year, when the state engineer’s office billed Lonetti for permitting fees. Illuminating what happened within the state engineer’s Carson City and Las Vegas offices during that four-and-a-half month period will be the key challenge for prosecutors.

They have a big job on their hands. Several former and current officials in the state engineer’s office have testified that they were swamped with a backlog of as many as 4,000 water right applications at the time and have little recollection about any particular permit. Several also testified that, because Southern Nevada Water Authority’s junior applications on the Virgin River had been approved back in 1994, the state engineer’s office — regardless of who was actually involved — was legally bound to approve Lonetti’s senior application.

In addition, key documents are missing from the state engineer’s official file for Lonetti’s application, further complicating the effort to reconstruct exactly what happened. (Some have hinted, privately, that this is further evidence of Coache’s hidden hand.) But probably the most exasperating problem facing prosecutors is that no one in the state engineer’s office has testified that Coache improperly influenced the approval of Lonetti’s permit.

In a deposition taken in late 2013, Detective Chio admitted  that the case against Coache is far from airtight. “There’s no direct evidence,” he said. “It’s all circumstantial.”

Still, Coache will have to refute three big pieces of evidence. The first is Lonetti’s contract with Rio Virgin, and the fact that Coache was one of two people who controlled the company’s bank account. Second is the $1.3 million deposit that Lonetti made into that account the day after the Authority paid him for the water. Finally, detectives discovered a copy of the state engineer’s file for the 1990 water right in Coache’s basement home office. It was the only permit file from the state engineer’s office that was found in Coache’s house, Chio told the grand jury.

Coache, meanwhile, says that Chio simply botched his detective work. “I think everything he did in the investigation was wrong,” Coache said during his deposition. “He had no understanding of water rights … and he fabricated testimony to the grand jury.”

Coache is adamant that he had nothing to do with the water deal. He called Chio’s testimony about the permit file “an outright bullshit lie,” and says he had thousands of pages of state engineer’s files in his home office. Coache also maintains that he was only ever involved in approving groundwater rights, not surface water rights like the Virgin River permit that Johnson helped Lonetti argue for.

Coache’s defense will likely hinge on an assertion that the $600,000 he allegedly received from the water deal was actually a buyout from Johnson for a jointly owned parcel of desert some 50 miles outside Las Vegas, at a place called Halfway Wash. Yet Coache’s explanation, at least as conveyed through court documents, is founded upon one extremely questionable premise. Coache paid $70,000 for that land when he originally purchased it, in 2004. Yet he claims that when he subsequently sold his share to Johnson, just four years later, the two men based the sale price on a mutually agreed property value of $1 million.

 

WINNERS AND LOSERS
So far, the case has received little publicity outside Mesquite, though Coache and Johnson’s arrests merited a smattering of coverage in the Vegas papers. But if the charges are proven true, the case could be a bigger harbinger of things to come.

It has become academically fashionable to attempt to sort the winners of climate change from the losers. When it comes to water, that cast has usually been very traditionally defined: large urban water agencies and powerful irrigation districts versus Indian tribes, poor farming communities and the environment. But the scarcity that will come with climate change could shake things up in unexpected ways. And it may well draw another player into the fray: a new breed of speculator and profiteer that smells profit in crisis.

As the case finally nears trial, Coache spends his days running a one-man consulting business from the basement of his home. Johnson has survived by doing odd jobs, like yard work and changing locks at foreclosed houses in Las Vegas. The legal cases against him, he said in a deposition, have made him “politically somewhat sensitive” as a hydrologist, and he apparently hasn’t been anywhere near a drill rig since he resigned in 2010.

There is one undisputed winner in the saga: Vegas. The Southern Nevada Water Authority won’t attempt to recover the $1.3 million worth of homes, oil leases and cash that originated with the alleged kickback and were seized by Las Vegas police. Those assets technically derived from money that Lonetti received from the Water Authority, but they will instead go to Virgin Valley Water District. That deal allows the Water Authority to keep what it was after from the start: Lonetti’s prized 1914 Darling right, plus the high-value pre-1929 water it got in trade from Virgin Valley. In the new reality of high-stakes deals on the Colorado, $1.3 million may be just an incidental cost of doing business.

Matt Jenkins has covered water for High Country News for more than a decade. He currently writes from New Delhi.

This coverage is supported by contributors to the High Country News Enterprise Journalism Fund.

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