UBS AG, the top underwriter of U.S. municipal bonds last year, also led in another category -- paying former government officials to win contracts to underwrite the debt that public agencies use to build schools, hospitals and roads.
The Zurich-based bank paid $2.4 million last year to 28consultants, including Dennis Archer, former Detroit mayor, andRay Sullivan, a spokesman for President George W. Bush when hewas governor of Texas. Sullivan's wife, Leslie, is Texas GovernorRick Perry's chief fund-raiser.
The use of consultants has come under scrutiny from theMunicipal Securities Rulemaking Board, the municipal bondregulator in the U.S., as a pending federal investigation inPhiladelphia is examining political corruption in public finance.On a national level, more than 80 percent of municipal bonds areprivately arranged, without competitive bidding.
"The fundamental question that's being avoided or evadedis whether or not undue influence is being brought to bear,"said William Kittredge, 55, founder of the Center for the Studyof Capital Markets and Democracy in Arlington, Virginia. "Is thepublic suffering as a result by paying more?"
The 10 largest underwriters paid $11.2 million to bondconsultants last year, according to filings with the Alexandria,Virginia-based MSRB. Citigroup Inc., based in New York, rankedsecond in payments to consultants with $1.83 million, followed byNew York-based JPMorgan Chase & Co. with $1.41 million, filingsshow.
Banks pay consultants to help win bond work becauseconsultants know about the financial needs of state and localbond issuers, said Rob Barber, co-head of public finance atMerrill Lynch & Co. in New York.
'Good Understanding'
Municipal bond consultants develop marketing strategies,talk to public officials and advise banks on ways to winunderwritings.
"They are on the ground often with the clients and theyhave a good understanding of what the clients' needs are,"Barber said last April. Merrill spokeswoman Terez Hanhan said onFeb. 8 that Barber had nothing to add to that interview.
Merrill, the biggest securities firm by capital according tothe New York-based Securities Industry Association, ranked eighthin payments to bond consultants in 2004, spending $675,592,filings show.
Merrill is a passive, minority investor in Bloomberg LP, theparent of Bloomberg News.
UBS, Europe's largest bank by assets, increased its paymentsto consultants by 18 percent in 2004 from 2003. It also ledbanks, with $107,700 in payments to political action committees,its filings show.
Former Democratic Leader
UBS reported that its highest-paid consultant in 2004 wasNational Strategies Inc., a Washington-based firm that solicitedbond work for UBS in California, Georgia, Kansas, Oklahoma, andWest Virginia, the bank's filings said.
The bank reported that it paid National Strategies $767,542for "assisting and advising UBS Financial Services Inc. onfinancings."
National Strategies, headed by Al Gordon, a former chairmanof the New York State Democratic Party and aide to formerGovernor Mario Cuomo, helped UBS win $7.9 billion in underwritingwork in California, the MSRB filings show.
UBS spokeswoman Susan Austin said in an e-mailed statement:"The firm's use of consultants is fully transparent and complieswith applicable MSRB rules. All contributions made by UBSFinancial Services Inc. as a firm -- and contributions made byUBSFSI employees -- are also made in compliance with MSRB rulesand applicable laws, rules, and regulations."
Gordon didn't return calls seeking comment.
One member of National Strategies, Colleen Quinn, has workedon two presidential campaigns and three statewide politicalcampaigns in California, according to the company's Web site.
Quinn didn't return a call seeking comment.
Citigroup Consultants
Citigroup reported that it paid Smith & Ballard Inc. ofTallahassee, Florida, $120,409 in 2004 for consulting help inwinning public finance work. Smith & Ballard helped Citigroup win$375 million in state insurance bonds.
Brian Ballard, a principal in the consulting company, is aregistered state lobbyist and was chief of staff to FloridaGovernor Bob Martinez when he served from 1987 to 1991.
Ballard didn't return a phone call seeking comment.Citigroup spokesman Joseph Christinat declined to discuss thebank's dealings with consultants.
Citigroup also paid L. Garry Smith & Associates in Tampa,Florida, $243,170 as a municipal bond consultant in 2004. Thecompany is headed by Smith, who was a chief of staff to FloridaGovernor Bob Graham, who served from 1978 to 1986.
Tampa Sports Authority
Citigroup reported that it paid the company last year toconsult with the Tampa Sports Authority about possible financing.Smith was a board member of that authority from 1999 to 2003.
Smith declined to comment.
Last year, the MSRB sought to ban underwriters from hiringconsultants. In a notice filed April 5, 2004, on the proposal,the MSRB wrote: "Some consultant practices challenge theintegrity of the municipal securities market."
In the notice, the rulemaking board said politicalcontributions by consultants may conflict with its 1994 pay-to-play rule, called G-37, which bars underwriters from contributingmore than $250 to local officials who award bond work.
"The MSRB has noted in recent years significant increasesin the number of consultants being used, the amount theseconsultants are being paid and the level of reported politicalgiving by consultants," the board wrote in the notice. "TheMSRB is concerned that some of these political contributions maybe indirect violations of Rule G-37."
New Proposals
The MSRB now wants to subject consultants to the samecampaign contribution restrictions as public finance bankers faceunder Rule G-37.
Christopher Taylor, executive director of the MSRB, said theboard may announce its planned new proposal as soon as next week.The board is holding a three-day meeting this week, and Taylorsaid underwriters' use of consultants will be a primary topic.
"Everyone hopes we can reach a decision at this meeting,"Taylor said. "This is not an easy topic."
The Bond Market Association, which last June wrote a letterto the MSRB saying that consultants help spur competition,supports limiting political contributions while it opposestreating consultants as bank employees.
The New York-based trade group represents bond dealers.
"Consultants serve a legitimate and important role in theindustry by permitting broker-dealers that do not have theresources to maintain an office or an adequate presence in aparticular jurisdiction to compete for municipal securitiesbusiness," wrote Lynnette Hotchkiss, associated general counselof the Bond Market Association in the June 4, 2004, letter.
'Expect a Return'
The fact that the largest banks paid the most to consultantsshows the benefits of hiring politically connected people to winbond work, said Kittredge, who started the center in Arlingtonlast year to study public finance.
"These are for-profit organizations," said Kittredge, aformer public finance professor at the University of Georgia inAthens, Georgia. "They don't spend money without a reason. Theyexpect a return on their investment."
UBS also reported the largest single political contributionamong underwriters, a $30,000 donation to the Republican Party ofTexas's administrative account in the third quarter.
MSRB rules permit municipal bond underwriters to contributeto political action committees as long as the committees don'tserve as conduits to contribute to officials in charge ofunderwriting selections.
In September, UBS was named as a senior manager on the first-ever sale of highway bonds for the Texas Mobility Fund in April,a $1 billion deal. A year before, UBS donated $20,000 to asuccessful referendum campaign to authorize the sale of $3billion of highway bonds. Such contributions are legal in Texas.
`No Influence'
James Bass, director of finance for the Texas Department ofTransportation, said UBS was selected through a competitiveprocess. Firms were scored based on their knowledge of statelegislation, expertise in transportation finance and ideas "tomaximize leverage," Bass said.
"I can honestly tell you we had no influence from anyelected official," Bass said.
Nevis Securities LLC, an Atlanta-based minority-owned firm,ranked second in consulting fees, collecting $500,000 fromJPMorgan, the second-largest U.S. bank, behind Citigroup.
Nevis, whose principals include Julius Hollis, once an aideto former Atlanta Congressman and Mayor Andrew Young, helpedJPMorgan win underwriting of $1.3 billion in utility bonds forMemphis, Tennessee, said Nevis Managing Director and ChiefFinancial Officer Marrion Heflin.
Nevis also helped JPMorgan become co-manager of $293 millionof bonds for the Atlanta airport.
'It's All About Relationships'
"This business is all about ideas and it's all aboutrelationships," said Heflin. JPMorgan holds an equity interestin Nevis, he said.
In filings with the MSRB, JPMorgan said Nevis representedthe bank "in the state of Georgia and elsewhere as agreed to bythe parties."
JPMorgan spokesman Michael Dorfsman declined to comment onNevis's work for the bank.
Last month, two former JPMorgan bankers pleaded guilty tofraud in a Philadelphia federal criminal corruption case forpaying a bond lawyer and political supporter of Mayor John Street$50,000 in exchange for JPMorgan getting a $423,963 fee for bondwork in the city.
Charles LeCroy and Anthony Snell were accused of arranging$50,000 in fees for Ron White, a Mobile, Alabama-based lawyer whowas an adviser to Mayor Street. White died on Nov. 4. The formerJPMorgan bankers are awaiting sentencing. Three other people inthe case have pleaded guilty, one was acquitted and five areawaiting trial.
No More Consultants
JPMorgan, the largest user of municipal consultants in 2003,stopped using all of its consultants in the first quarter of2004. It paid Nevis the $500,000 in the second quarter of 2004,after the consulting company had completed its work for the bank.
Bank spokesman Dorfsman said the bank dropped itsconsultants because it backs the MSRB's goals and because itsacquisition of Bank One Corp. gives JPMorgan a broader nationalreach so it no longer needs consultants.
Former Detroit Mayor Archer said his political connectionsraised no ethical issues in his work as a consultant for UBS.
He said he had a personal friendship with Atlanta MayorShirley Franklin and held a fund-raiser for Franklin when she wasrunning for office in 2001. He said that relationship had nothingto do with Atlanta choosing UBS to manage an $849 million bondsale in September for the city's water system.
Costs Taxpayers
"At the end of the day, it's the municipalities that makethe decision," Archer said in a telephone interview from hisoffice at Dickinson Wright PLLC in Detroit. "They're not goingto be influenced by Dennis Archer or anybody else."
No-bid bond sales, known as negotiated underwriting, havegrown to 81 percent of public finance in 2004, up from 27 percentin 1974, according to Bloomberg and Thomson Financial data.
Negotiated sales are more expensive for taxpayers, sixacademic studies have shown. A 2002 study of 148 New Jersey salesby University of Connecticut professor Mark Robbins found thatgovernments using competition saved $1.26 million.
Following are the 10 largest underwriters ranked by theamount they paid consultants to help win municipal bond work in2004:
Underwriter Amount Spent on ConsultantsUBS $2.36 millionCitigroup $1.85 millionJPMorgan $1.41 millionBear Stearns $1.26 millionMorgan Stanley $1.17 millionLehman $910,677RBC Dain Rauscher $769,101Merrill Lynch $675,592Goldman Sachs $629,430Bank of America $187,900
With reporting by Andrew Pratt in Trenton and David Dietz inSan Francisco. Editors: Neumann, Williams, Henkoff, Wolfson,Swardson
