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Saturday, April 19, 2014 6:14 PM
Improbable Private Prison Scam Plays Out in Hardin, Montana

by Alex Friedmann

“Trouble, oh we got trouble, right here in River City! With a capital ‘T’ that rhymes with ‘P,’ and that stands for pool.”
– Professor Hill

The above quote is from The Music Man, a 1957 Broadway musical in which “Professor Hill,” an opportunistic con artist, convinces the gullible residents of a small rural town to buy instruments and uniforms to form a marching band. Replace “River City” with “Hardin” and “pool” with “prison,” and you have a modern-day adaptation of this classic performance – complete with a shady conman, unsuspecting townfolk and entertaining hijinks. The only thing missing is a musical score. And a happy ending.

A Prison Without Prisoners

PLN recently reported on the plight of Hardin, Montana, a middle-of-nowhere town with a population of 3,500 located in Big Horn County about an hour’s drive east of Billings. Hardin made national headlines last April when the city, desperate to find prisoners to fill its vacant 464-bed correctional facility, offered to take maximum-security terrorist detainees housed at the U.S. military prison in Guantanamo Bay, Cuba. [See: PLN, October 2009, p.28].

Hardin’s Two Rivers Detention Center was completed in September 2007 with the goal of spurring economic development and creating jobs, but has sat empty for the past two years. The city, which owns the prison through the tax-supported Two Rivers Trade Port Authority (TRA), has been unable to locate any prisoners. The Montana Department of Corrections wasn’t interested in using the prison, nor were neighboring counties. Hardin’s attempt to house sex offenders at the facility also fell flat.

Initially, Montana’s Attorney General declared the Two Rivers Detention Center could not hold out-of-state prisoners; although the city won a lawsuit in 2008 overturning the Attorney General’s opinion, Hardin has been unsuccessful in enticing other states to send their prisoners to the facility. One major problem is the physical layout of the prison, which includes open-dorm housing units and relies on indirect supervision.

Thus, after the $27 million in revenue bonds used to finance the Hardin facility went into default in May 2008, TRA officials, lacking other options, said they were willing to take the Guantanamo detainees. That was more of a public relations ploy than a serious offer, though, since the medium-security Two Rivers Detention Center was ill-equipped to handle maximum-security prisoners without extensive – and expensive – upgrades. Regardless, Hardin’s proposal generated widespread media attention, which attracted a company that made city officials an offer they simply couldn’t refuse.

On Sept. 10, 2009, Hardin announced a 10-year contract with the American Private Police Force Organization (APPF) to house prisoners at the Two Rivers facility. A complete unknown in the private prison industry, APPF had been in discussions with the TRA for months prior to the announcement of the contract. The deal was negotiated by TRA executive director Greg Smith, other TRA officials and former Hardin city attorney Rebecca Convery.

According to APPF’s website (www.americanpolicegroup.com), the company was in the business of providing paramilitary and security services as well as investigative work such as polygraph testing, finding missing persons, checking up on cheating spouses, and “kidnapping prevention & ransom recovery.” The firm said that it had offices in Santa Ana, California and Washington, D.C., and played “a critical role in helping the U.S. government meet vital homeland security and national defense needs.” For example, APPF stated it could activate a battalion of special forces soldiers within 72 hours.

The same day that the APPF contract was announced, PLN began preliminary background research into the company. Within a matter of hours it was learned that APPF had been incorporated in California in March 2009 and its website went up two months later; the firm’s Washington, D.C. address was at a location that provides “virtual office” services, but APPF didn’t have an account there; the company was not registered to do business in D.C. or Montana; and APPF was not listed in a database of federal contractors.

These inconsistencies led PLN to note in our October article, “In their desperation ... Hardin officials may have signed up with a shady company that has an even less realistic chance of success than housing prisoners from [Guantanamo].”

Too Good to be True

The public face of APPF was “Captain” Michael Hilton, who initially said he did not want his last name mentioned because he was involved in security work. Hilton, a slightly-built man in his 50s with a pronounced Serbian accent, had a penchant for sharp business suits when he wasn’t wearing a security uniform complete with an APPF badge and shoulder patches. He described himself as a naturalized U.S. citizen from Montenegro – a small European nation near Serbia – with extensive military and law enforcement experience.

According to APPF’s contract, the company would make annual $2.6 million bond payments for the Hardin prison and pay the city $5.00 per diem for each prisoner housed at the facility. Hilton also had grand plans of investing at least $17 million to build a military and law enforcement training center for U.S. and international forces. APPF wanted to expand the prison to 2,000 beds, and under the company’s management the Two Rivers complex would include a homeless shelter, animal shelter and forensics lab.

Eighty percent of the jobs at the facility would go to local residents, plus free health care would be provided. APPF would further take care of citizens without enough to eat. “So if anybody is hungry in the city of Hardin if they cannot drive, we will send police officers with food,” said Hilton, who added that he wanted to put Hardin “onto the world map.”

If APPF’s promises sounded too good to be true or perhaps a touch improbable, that didn’t faze TRA officials who were overjoyed to finally find a contractor for the city’s empty detention center. “I am just thrilled for the city of Hardin and I can’t wait to see it all just come together,” said TRA director Greg Smith.

Others were not as enthused. “It doesn’t make any sense at all. They [APPF] come on like Mother Teresa in camo,” observed Frank Smith, field organizer for the Private Corrections Institute (PCI), a non-profit watchdog group that opposes prison privatization. PCI worked in cooperation with PLN to conduct background research into APPF.

Hardin officials apparently were only interested in the bottom line. Even if the Two Rivers facility was operating at half capacity, it was estimated the city would receive over $365,000 per year under APPF’s contract, with the first payment due on February 1, 2010. This potential windfall led TRA vice president Al Peterson to remark, “Holy crap. Right now we’re on a shoe string.”

However, troubling inconsistencies continued to stack up. The TRA refused to release a copy of the contract, saying it was undergoing revisions and had not been signed by U.S. Bank, the bond trustee. Although APPF claimed it was a recently-formed spin-off of a major security firm, it declined to provide the name of its parent company. “We have enemies, worldwide – not in the U.S., but you never know – so it’s for security purposes,” Hilton said of APPF’s lack of transparency.

Nor was it certain where APPF planned to find prisoners to fill the Two Rivers facility. The Montana DOC stated it was not involved in the deal. While there was speculation that the prison would house federal detainees, U.S. Marshal Dwight MacKay, in the agency’s Billings office, said “I don’t know where in the heck they’re getting them from.” Others suggested the prisoners might come from California’s overcrowded prison system, which is under court order to reduce its population and already houses about 8,000 prisoners in out-of-state facilities.

“It will gradually be more clear as things go along,” said APPF’s newly-hired attorney, Maziar Mafi. As for the company’s apparent dearth of experience in managing prisons or jails, Hilton claimed APPF was primarily interested in building and operating the proposed training center. “We don’t really want to get into the prison business,” he explained.

Despite these assurances, future problems were foreshadowed by the abrupt suspension of TRA director Greg Smith, who was placed on administrative leave just days after the contract with APPF was announced. No reason was given for his suspension.

Foreign Mercs and Martial Law?

Hardin officials fiercely defended APPF, evidently considering the company’s offer to operate the Two Rivers facility to be the town’s financial salvation. “I’ve seen their documents. I’ve seen their credentials,” Peterson insisted. “They are who they say they are, and they are going to do what they say they are going to do.”

However, APPF’s extreme secrecy led some skeptics – including PLN – to question the legitimacy of the firm’s proposal to run the Hardin prison. This cautious approach was not shared by the local news media. “As far as I’m concerned, if a little secrecy means good, high-paying jobs and an economic boost to the city, then I say go for it,” said Jim Eshleman, who writes for the Big Horn County News.

Others, primarily with right-wing anti-government viewpoints, saw a more sinister plot. They alleged that APPF was President Obama’s private paramilitary police force; that the company was planning to confiscate guns from Hardin residents; and that the H1N1 (swine flu) vaccine would be forced on the town’s population, with those who refused being quarantined in the Two Rivers facility.

As bizarre as these beliefs were, conspiracy theorists went into overdrive when Hilton and other APPF officials arrived in Hardin on Sept. 24, 2009 in three black Mercedes SUVs with “City of Hardin Police Department” decals. Which presented a problem, because Hardin doesn’t have a police force.

Local law enforcement is provided by the Big Horn County Sheriff’s Department under the direction of Sheriff Lawrence “Pete” Big Hair – though the city was in the process of deconsolidation, which would let Hardin create its own public police agency. The sight of private security personnel on city streets under the guise of a police force confirmed the worst fears of anti-government activists and self-styled patriots.

For its part, APPF explained the police decals were a symbol of good faith that the company was committed to helping Hardin form its own police force, and that the SUVs would be donated to the city as patrol vehicles. Upon request by Hardin officials, the decals were quickly removed.

Regardless, unfounded rumors continued to run rampant – including that APPF was installing a security gate at the entrance of the city. Businesses in Hardin reportedly received dozens of phone calls from concerned out-of-towners wanting to know if martial law had been imposed. Conservative talk-radio host Alex Jones jumped on the story, traveling to Hardin and instigating reports that APPF might be a subsidiary of military contractor Blackwater (now known as Xe), or possibly part of a United Nations civilian police force.

The fact that APPF’s corporate logo included a Serbian coat-of-arms with a double-headed eagle didn’t help matters, as some paranoid fearmongerers insisted that meant the firm was composed of foreign mercenaries. Hilton said the use of the Serbian crest was intended to honor his family’s heritage; the company’s emblem was subsequently changed.

The APPF controversy became so heated that TRA officials had to place a notice on their website stating, “We welcome anyone to visit our town! There are no commandos in the streets. There is no fence or gate being built around Hardin. People are free to come and go as they please.” Interestingly, those who voiced objections to a private police force did not seem to have a problem with privately-operated prisons, which have become business-as-usual in the U.S. criminal justice system.

APPF received a boost in credibility on September 25, when Billings Gazette reporter Becky Shay unexpectedly resigned from the newspaper to become the firm’s spokesperson. She was promised a $60,000 annual salary, signing bonus, company vehicle (she received one of the Mercedes SUVs), and assistance with buying a home. Shay, who had previously reported on the Hardin prison, expressed complete trust in APPF. “I know enough about where the money is coming from to be confident signing on with them,” she said.

The Scam Hits the Fan

Meanwhile, PLN continued to research APPF and, more specifically, company front man Michael Hilton. PLN discovered that a defendant named Michael Hilton had been sued in a fraud and conspiracy lawsuit in California involving an assisted living center, which resulted in a $1.4 million judgment. An appellate ruling in that case described Hilton as a convicted felon and “the main perpetrator of the fraud.” See: Bentley v. Carella, 2003 Cal.App.Unpub. LEXIS 8418 (Cal. App. 2d Dist., Sept. 4, 2003).

PLN tracked down two of the plaintiffs and one of the co-defendants in Bentley, who all confirmed that the Michael Hilton named as a defendant in the case spoke with a Serbian accent. Additionally, plaintiff Richard Earnhart and co-defendant Dr. Joseph A. Carella verified that the Michael Hilton in the Bentley suit was the same person employed by APPF, after viewing news photos of Hilton at the Two Rivers prison in Hardin. Earnhart also mentioned that Hilton went by the alias of “Miodrag Dokovich.”

A search of federal court cases found two bankruptcy filings under the name of Michael Hilton, with Miodrag Dokovich listed as an alias. The filings included Hilton’s Social Security Number. Armed with this information, a check of California criminal records revealed that Hilton had arrests dating back to 1990 in Los Angeles for grand theft; in Santa Ana for grand theft and writing bad checks; and in Orange County for 13 counts of grand theft, diversion of construction funds and attempted grand theft. Hilton had pleaded guilty to the Orange County charges and was sentenced in March 1993 to more than three years in prison.

State court documents and a Lexis search uncovered Hilton’s use of at least a dozen other aliases, including Midrag Dokovitch, Michael Djokic, Anthony Michael Hilton, Miodrag Djokich, Miodrag Djokovich, Michael Hamilton, Chedomire Djokich and Hristian Djokich, plus related variants.

PLN was the first news publication to conclusively tie APPF’s Michael Hilton to the Bentley fraud case, which led to the discovery of his criminal record. PLN provided its research findings to the Associated Press in Montana, which was simultaneously conducting its own investigation. The AP broke the story on September 30, 2009, concurrent with a Billings Gazette investigative report on Hilton published the same day.

The AP and Gazette articles included additional details about Hilton’s dubious past, including a 2003 DUI conviction in Orange County, California that resulted in a 45-day jail sentence plus three years probation. Further, Hilton had been accused of fraud, larceny, false pretenses and breach of contract in numerous lawsuits, which resulted in over $1 million in civil judgments against him.

In one of those cases, Hilton was accused of scamming money from investors to create commemorative Super Bowl coins, though no license was obtained from the NFL and no coins were ever produced. In another scheme, Hilton reportedly posed as an art dealer to steal a silver statue worth $100,000.

“That prison [in Hardin] – he should be in it,” said Richard Earnhart, who had obtained a judgment against Hilton in the assisted living center scam and referred to him as a thief and a conman. Dr. Carella, one of Hilton’s co-defendants in the Bentley suit, was apparently himself victimized by Hilton and used as a “pawn,” according to court documents. Carella said he lost his medical practice and had to file bankruptcy due to Hilton, who misappropriated investors’ money “like a Ponzi scheme.”

Hilton had used appearances of affluence in his prior fraudulent ventures. For example, as part of the assisted living center scam, Hilton gave Earnhart a new Mercedes – which was repossessed three weeks later. When he stole the silver statue, Hilton had arrived at the victim’s house in another Mercedes driven by a chauffeur. This fit in with his arrival in Hardin with a trio of Mercedes SUVs.

When asked about Hilton’s criminal record, APPF spokesperson Becky Shay responded, “The documents speak for themselves ... the documents are what they are.” She referred to Hilton’s previous business dealings as his “private business,” and stated, “My job is not to give you the answers you want, my job is to give the information I’ve been employed to release or not release.” Shay continued to insist she had made “a great career choice” by joining APPF, but broke down in tears during an emotional press conference.

Prison Contract Unravels

Following the news reports about Hilton’s criminal past and history of civil fraud cases, APPF’s plan to operate the Two Rivers prison began to fall apart. Montana’s Attorney General stepped in the day after the AP and Gazette articles ran, launching an investigation into APPF and requesting documentation from both the company and Hardin officials. The Attorney General expressed concern that APPF may be violating the Montana Unfair Trade Practices and Consumer Protection Act by making false statements.

On October 1, 2009, former Hardin city attorney Rebecca Convery resigned from her contract position with the TRA, where she had helped negotiate the deal with APPF, citing a conflict of interest. When Convery worked for the TRA she had shared an office at the Two Rivers facility with Hardin’s animal control officer, along with several cats, a pygmy goat, hamsters, a gerbil and a field mouse named “Mr. Jingles,” which was the prison’s unofficial mascot.

“Those of us who spent months of our time trying to secure inmates for the facility often joked that those furry critters were the only inmates the facility was ever going to house,” said Convery. She also criticized the TRA, noting “There’s been no acknowledgement on the board’s behalf that this whole thing has been a fiasco.”

APPF attorney Maziar Mafi contacted PLN on October 2 and said he no longer represented the company. In a letter to TRA officials, Mafi wrote that he had “decided to discontinue my work with American Police Force at this time.” It was later learned that he had guaranteed lease payments for two of the Mercedes SUVs used by Hilton.

Amazingly, despite the discovery of Hilton’s criminal record and history of fraudulent business deals, plus significant doubts about the legitimacy of APPF, Hardin officials refused to give up hope. “I don’t know that his background has affected his position or his ability to do his work,” remarked City Council member Carla Colstad.

TRA vice president Al Peterson agreed. “I believe that the TRA has a better chance of getting the detention facility open with [APPF] than with any Montana officials,” he stated. “What do we have to lose if it doesn’t work out?”

Indeed, other than the city’s reputation and the dignity of its elected leaders, there was little risk. Hardin wouldn’t lose any money as a result of the deal with APPF because the prison’s bondholders were on the hook for the vacant facility. Rather, the main costs to Hardin officials were in terms of embarrassment, lost opportunities and increased difficulty in attracting future economic development or bond investors. But as Peterson put it, APPF was “a better shot than nothing.”

Another major discrepancy involving APPF was revealed during a TRA meeting on October 5. Hilton had told TRA officials that the Two Rivers facility would be run by Michael S. Cohen, a former U.S. Secret Service agent who is currently the vice president of Ohio-based International Security Associates. When contacted, however, Cohen denied that he had agreed to manage the prison, saying he only sent a résumé to Hilton and had cursory talks with him. “I feel sorry for everyone up there in Montana,” said Cohen. “He’s [Hilton] scamming everyone up there.” Ironically, it was subsequently discovered that Cohen had a criminal record, too. He was convicted of stealing $2,800 during Secret Service investigations and served about 14 months in federal prison. See: United States v. Cohen, 301 F.3d 152 (3rd Cir. 2002).

Due to growing uncertainty and opposition by worried city residents, the TRA decided to place APPF’s contract on hold. “We won’t move forward. I don’t think any of us want to be on the chopping block,” said TRA president Gary Arneson. Greg Smith, the TRA’s former director who had been suspended about a month earlier, submitted his official resignation during the October 5 meeting.

One of the Hardin officials who had initially traveled to California to meet with Hilton was Smith’s wife, Kerri. At the time that the APPF contract was announced, Kerri, a mayoral candidate, told city residents to “just go with the flow and everything will be fine.” Hilton had offered Kerri a job with APPF if she was not elected mayor. While Greg Smith was reportedly informed about Hilton’s criminal record before the contract with APPF was signed, he said it wouldn’t be a problem. In hindsight that may not have been the best approach.

On October 9, 2009 the contract between APPF and the TRA was formally dropped, just days before the deadline to produce documents demanded by the Attorney General’s office. The contract had never been finalized because it was not signed by the bond trustee. Becky Shay acknowledged that the deal had “gone sour” due to extensive media coverage of Hilton’s shady background, but claimed “there was never any fraudulent intention.”

Al Peterson was unapologetic about the implosion of APPF’s proposal to operate the Two Rivers prison and Hilton being unmasked as a conman. “I can’t say it was a mistake,” Peterson remarked. “We make the best decision we can based on the information we have on hand. I don’t think we did anything we couldn’t or wouldn’t do in the future.”

When Montana Governor Brian Schweitzer commented on the situation involving APPF, he referred to Hilton as “a low-level card shark.” Schweitzer noted that “the people of Hardin are good people”; however, he also said “the people that they have elected to serve them have been duped by con artists over and over and over and over again.”

The Attorney General’s office discontinued its investigation on October 13, as APPF was no longer doing business in the state and the Attorney General was “unaware of any Montanans who have been harmed financially by this company.” It was later reported that Hilton had written a bad check for “about $1,000” to cover his stay at the Kendrick House Inn in Hardin, and that a retainer check he gave to an attorney in Billings likewise had bounced.

Former Gazette reporter Becky Shay, who had quit her job to sign on with APPF, never received a paycheck; the Mercedes SUV she was driving courtesy of Hilton was reclaimed in mid-October by ex-APPF attorney Maziar Mafi. According to an Associated Press report, Shay was back in her 1999 Dodge Intrepid.

Michael Hilton made his last stand in a California courtroom on October 30, one day after an arrest warrant was issued for him to appear at a judgment debtor’s hearing in the Bentley case. He testified under oath that APPF did not have a parent company and that he had no law enforcement or corrections experience. Hilton said he had raised about $100,000 for the Hardin venture from his father and four other investors, including his girlfriend. He stated he was broke and unable to pay his rent, and that all of APPF’s money was gone and the company’s account was overdrawn. “I’m out of the game. I’m done,” he said.

Hilton alleged his only remaining assets were four paintings, which he was ordered to turn over so they could be sold. He said he had created two of the paintings himself – apparently putting the “artist” in con artist. Hilton delivered the paintings on November 5, 2009, but it was unknown whether they were worth anything. His creditors might recover a small amount of money, though, as the TRA decided to reimburse Hilton for $1,504 in travel expenses from when TRA officials visited him in California during contract negotiations with APPF.

The refund was to avoid potential conflicts of interest.

A Cautionary Tale

When Governor Schweitzer said Hardin officials had been repeatedly tricked by conmen, he was referring to how the city ended up with an empty prison in the first place. “I believe the people of Hardin were duped by these construction people out of Texas to build the facility, then the bond people to build this they were duped, now we have these card sharks out of California who are there to dupe them,” Schweitzer stated.

Hardin was approached in 2004 by a consortium of prison developers headed by Corplan Corrections, a Texas-based company that, according to its website, “has developed prisons, jails, correction centers and detention centers” nation-wide, and provides “full service, from conception, to ‘selling’ the concept ..., interface with government officials, design, build, manage and financing.” Corplan offered the city a “turn-key” package in which the Two Rivers facility would be financed with revenue bonds and operated by Emerald Corrections – later changed to CiviGenics, which has since been acquired by Community Education Centers.

Other rural towns, primarily in Texas, also were approached to build publicly-owned and privately-managed prisons using revenue bonds, including the GEO Group-run Reeves County Detention Center in Pecos and the LaSalle County Regional Detention Center in Encinal, which is operated by Emerald Corrections.

The backstory as to how Hardin fell victim to greedy prison entrepreneurs, and was left with a vacant facility and bonds in default as a result, is told in an accompanying article in this issue of PLN, “Behind Montana Jail Fiasco: How Private Prison Developers Prey on Desperate Towns.” Nor is building speculative prisons a thing of the past, as small communities continue to be targeted for such questionable projects.

Most recently, some of the same prison developers that graced the city of Hardin with its mothballed Two Rivers facility – including Corplan, Municipal Capital Markets Group and Innovative Government Strategies – are trying to build a prison in the Tohono O’odham Nation, a tribal community in Arizona. In an unrelated venture, Corrections Corporation of America is negotiating with Wickenburg, Arizona to put a 3,000-bed facility in the town. Such speculative prison building persists despite research studies that have found little if any positive economic impact when detention centers are sited in rural areas.

“I believe it is the wrong direction to base economic development on corrections,” said Montana state Senator Steve Gallus. “The idea that it is sound economic policy to create profit from incarcerating people just simply does not make sense to me.”

Unlike in The Music Man, there was no happy ending to Hilton’s ill-fated attempt to con Hardin officials. The Two Rivers Detention Center still sits empty. Former TRA director Greg Smith is out of a job and former Gazette reporter Becky Shay is looking for work (she has applied for Smith’s old position). TRA president Gary Arneson announced on November 2 that he will not seek another term, while there have been calls for TRA vice president Al Peterson to resign. The residents of Hardin, which has an unemployment rate of more than 10 percent, remain without the much-needed jobs the prison was supposed to provide. The city now hopes to attract a Chinese-backed horse slaughterhouse.

Seeking a silver lining to the storm clouds that overshadowed the failed APPF contract, Peterson said the widespread media attention had led several other private prison companies to express interest in the Two Rivers facility. Ever the optimist, Peterson noted there was “no such thing as bad publicity.” Except, perhaps, when your city has become a national laughingstock due to poor decisions by its inept leaders. At least Hilton was right about one thing: He put Hardin, Montana on the world map.

If nothing else, the APPF meltdown should serve as a warning for small impoverished towns to avoid speculative private prisons that promise riches but deliver only problems. So long as modern-day snake-oil salesmen stand to profit from building and financing such facilities, however, there are sure to be more Hardins, other scams like APPF, and continued reliance on the misplaced notion of using prisons as a form of economic development.

That’s prisons with a “P,” which rhymes with “T,” and that stands for trouble.

Sources: Newsweek, www.tpmmuckraker.com, Billings Gazette, www.kulr8.com, Boston Review, www.kxnet.com, Associated Press, Big Horn County News, www.tworiversauthority.org, www.texasprisonbidness.org, www.americanpolicegroup.com, www.cryptogon.com, http://data.opi.mt.gov, Wickenburg Sun, The Missoulian, PLN investigative research



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