California's Brown allows firm to lower bid for counsel work.

LOS ANGELES -- California Treasurer Kathleen Brown awarded Orrick, Herrington & Sutcliffe a highly coveted two-year contract as general obligation bond counsel after the firm agreed to match a rival's lower bid.

Among the seven finalists in the competition, Cox, Castle & Nicholson submitted the lowest bid, setting its fee at 5.3 cents for every $1,000 of GOs the state issues. Orrick's original bid was slightly higher -- a flat fee of six cents per $1,000 of bonds.

"We asked Orrick if they could match" Cox Castle's fee request, "and they said yes," said Larry Kreig, general counsel for Brown. A key factor, according to assistant treasurer Hal Geigoue, was the long relationship between Brown's office and the law firm.

In a letter to Orrick mailed late last month, Brown informed the San Francisco-based law firm of its selection as the state's lead bond counsel for GO bonds until June 30, 1996. Cox Castle said it did not learn of its loss until The Bond Buyer called the firm on Monday.

Whether Orrick Herrington will stay as counsel is uncertain, given that Brown is campaigning for governor and will be succeeded in January by Democrat Phil Angelides or by Republican Matt Fong. "The next treasurer could bounce" the firm, Kreig said.

The rejection of Cox Castle's low bid for the potentially lucrative contract was "unfair and noncompetitive," said Gary Downs, an associate with Cox Castle. "That is not the way competitive bids should be run."

Cox Castle, a Los Angeles-based real-estate law firm that also has a public finance department, has accomplished "a lot of work for the state" during Brown's tenure, and "had always gotten good reviews from the state," Downs said.

"We knew that we were as qualified as any other firm" for the GO bond contract, and Cox Castle "consciously put in a low bid," he added.

Although the Brown letter notifying Orrick of its selection was dated Aug. 29, Downs said Cox Castle officials "have not received any correspondence from the state."

"I can't tell you if we will send a formal letter of protest at this point," Downs said, but he added that his firm would call Brown and Kreig to complain. "At the very least, they should allow us to resubmit our bids," he said.

During her nearly four years in office, Brown has prided herself on opening up the treasurer's office to market participants who traditionally have been denied access to state business. But Orrick Herrington's ties with the office apparently didn't hurt the firm's

"There is a long-standing relationship which was one of the factors that went into the decision" to choose Orrick Herrington, said assistant treasurer Geiogue. "But, also, the lowest-bid price was another factor that went into the decision. We wanted to get both for the state -- good value and a good firm."

Orrick has been the state treasurer's primary bond counsel for decades, Orrick partner Robert B. Feyer said Monday.

"It is accurate to say that Orrick is the only bond counsel that the state of California has ever had for its long-term debt," he said.

The "long-term relationship" with the treasurer's office "is very important to us," Feyer said. "We do view this as a civic as well as a business relationship."

Orrick originally bid 6 cents per $1,000 of GO bonds issued, but -- at Brown's request -- agreed to match Cox Castle's bid of 5.3 cents per $1,000, Feyer said.

"Ultimately, the treasurer requested us to confirm whether we would perform the services for a fee somewhat lower than we bid, and we said we would," Feyer said.

"The facts speak for themselves -- what was six cents is now 5.3 cents," Feyer continued. "The fee is not the sole and only determinant of our desire to do this."

Feyer said the bidding specifications did not state that the low bid automatically wins the state's GO bond legal business.

"Their bidding package never specified the selection would be based on fees alone," Feyer said. "That is never the case" in such bids.

"Given the volume here, seventenths of one cent" -- the difference between 5.3 cents bid by Cox Castle and six cents bid by Orrick -- "is not a major issue," Feyer said.

Cox Castle's Downs acknowledged that Orrick has "a long-standing relationship with the state," but said it does not follow that Orrick is therefore the best choice for the GO bonds contract.

GO-related legal work "is so easy" to handle because such bonds are sold regularly and that allows documents to become standardized from issue to issue, Downs said.

Initially, a dozen firms responded to requests for qualification proposals from the state treasurer's office, but five firms were disqualified for failing to satisfy certain requirements -- "notably, [proof of] minimum malpractice insurance," Kreig said.

The state's evaluation criteria covered five broad areas: minimum qualifications, public finance experience, assigned personnel and firm demographics, judgments against the firm, and its fee proposal. Among the seven firms chosen as finalists, Cox Castle provided the lowest bid of 5.3 cents per $1,000 of GO bonds issued.

Orrick and one other finalist -- O'Melveny & Myers -- both submitted bids of six cents per $1,000 bonds. Other bids were by Kutak Rock, 10 cents per $1,000; Leboeuf, Lamb, Greene & MacRae, 70 cents per $1,000; Brown & Wood, 75 cents per $1,000; and Mudge Rose Guthrie Alexander & Ferdon, $1 per $1,000.

Kreig said the fee proposals by the firms Leboeuf Lamb, Brown & Wood, and Mudge Rose were "excessive."

Under the state contract, Orrick receives a "benchmark fee." The treasurer's office pays Orrick 80% to 85% of the fee, and the remainder goes to Curls, Schwartz, Brown & Webster, a targeted-business enterprise firm chosen by Brown.

Since February 1992, Orrick has received $466,000 from the state for working on nine GO issues, while two targeted-business enterprise bond counsel firms have received $104,000 in fees. Grant and Duncan received $31,000 for two deals in 1992, and Curls Schwartz received $73,000 for work on seven deals in 1993 and 1994.

However, the $466,000 paid to Orrick for handling the state's GO bond legal work during the last two and a half years does not represent Orrick's total remuneration from the state.

Orrick also has handled legal work on state short-term offerings. For example, Orrick was co-bond counsel on California's $3 billion of revenue anticipation notes and $4 billion of revenue anticipation warrants issued in July.

Kreig estimated that Orrick received a flat fee of roughly $60,000 for handling the RAN legal work. The RAWs were issued by the state controller's office under a separate contract, and Kreig said he did not know how much Orrick was paid for that work.

In addition to the 5.3 cents fee per $1,000 of bonds issued that Orrick will receive, "the treasurer's office will be open to future discussion of adjustments to your professional fees," Brown told Orrick in her Aug. 29 letter.

The law firm could receive additional fees if it "performs any unique services outside the scope of the work described in our solicitation," Brown added.

Orrick is the front-runner among bond counsel firms in California. For the first six months of 1994, the firm worked on 116 California long-term issues, worth a combined principal amount of $6.35 billion, according to Securities Data Co. Jones Hall Hill & White was second-ranked, working on 76 issues with a total principal amount valued at $1.16 billion.

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