Washington - A three-judge federal appeals court could issue a decision in the challenge to the constitutionality of the Municipal Securities Rulemaking Board's political contributions rule within two to six months, lawyers for parties in the case said Friday after battling each other in court.
But even as the three judges in the case, Blount v. SEC, are weighing the fate of Rule G-37, the Securities and Exchange Commission and other regulators are being asked to investigate whether Merrill Lynch & Co. violated it in connection with municipal bond financings done for Orange County, Calif.
County records of campaign contributions made to Robert Citron, the county's former treasurer who lost his job just before the county filed for bankruptcy over financial troubles from a multibillion investment pool, show that three Merrill Lynch employees each contributed $1000 contributions to him on June 13, about seven weeks after the political contributions rule took affect.
The Merrill employees include Michael Stamenson, who reportedly handed Merrill's Orange County account, Debra Harris and Duane Canaga.
Under the rule, a broker-dealer is prohibited from doing any municipal bond business with an issuer client for two years after any of its "municipal finance professionals" contribute to that client. The rule covers any employees who solicit municipal bond business for their firm even if this is a very small portion of their work.
The Teamsters Union has alleged that the Merrill employees were covered by the rule and that because of their contributions to Citron, Merrill violated the rule's restrictions when it later participated in several of the country's municipal bond deals.
Merrill served as underwriter for at least $775 million of the country's tax-exempt and taxable note issues done after June 13, according to data from Securities Data Co.
Merrill Lynch denied the allegations. "This is part of an ongoing vendetta by the Teamsters to attempt to draw Merrill Lynch into a labor dispute between the Teamsters and a subsidiary of a company in which certain investment funds managed by Merrill Lynch have an interest," the firm said Friday. The dispute Centers around Pony Express Courier Corp., in which Merrill has a minority interest through a subsidiary.
"These political contributions did not violate any regulations on the industry's voluntary ban," Merrill said in its statement Friday. "The employees involved were, not municipal, finance professionals and were not prohibited from making such contributions."
But Merrill officials refused to provide job titles or job descriptions for the employees or to discuss their relationships with Orange County.
"We don't know whether or not those individuals are covered by-the rule," Christopher Taylor, executive director of the Municipal Securides Rulemaking Board, said.
The SEC issued a statement Friday saying that the commission "has been actively reviewing events related to the situation in Orange County" and has "the authority and the responsibility to regulate dealers to eliminate corrupt practices such as "Pay-to-play" in the municipal market.
One regulator said Also that National Association of Securities Dealers is aware of the charges" against Merrill and will probably investigate.
The allegations against Merrill provided an interesting backdrop for the court battle over the rule.
Alabama bond dealer William Blount filed suit against the SEC to to overturn the political contributions earlier this year, charging that its approval of the rule violated First Amendment rights to free speech and Tenth Amendment state sovereignty rights.
"We don't have any problem with the part of the rule that says you have to tell us what contributions you made, we never did," Blount, who also chairs the state's Democratic party, said after the court hearing.
"My problem with the rule was that it told us to whom we could contribute and, most important to me, was it told me I could not solicit" political contributions, he said.
Kevin Baine, the lawyer with Williams & Connolly who is representing Blount, told the three-judge panel of the U.S. Court of Appeals the District of Columbia which he the case that Blount would not have opposed the rule if it had merely call for disclosure of political contribution and limited their size.
Baine charged that the rule, as adopted, is a flagrant violation of the First and Tenth amendments.
He said the SEC and MSRB had "joined forces" to adopt a rule that "is a pure and simple ... attempt to censor the content of political speech" by those engaged in the municipal bond business.
"Never before has the federal government attempted such a restriction on the content of political speech by private citizen," he said.
Baine charged also that the rule is an attempt by the SEC to "regulate state election campaigns."
But Harvey Pitt, a lawyer with Fried, Frank, Harris, Shriver & Jacobson representing the MSRB, said Baine's constitutional charges were "beside the point" because the rule was initiated and adopted by MSRB, a self regulatory organization that is not an arm of the government.
"The rule was not initiated or coerced by the SEC in any way at all," he said. The SEC only ruled-that the rule was not inconsistent with the securities laws, he said.
Baine said the rule's restrictions are not justified because they merely strive to "eliminate the perception of abuse which may create a potential of damage to investor confidence."
But Simon Lorne, the SEC's general counsel, said the rule was initiated by broker-dealers through the MSRB because they believed there were widespread pay-to-play problems in the municipal market.
Lorne said also that in the municipal securities business perception is important because it affects investor confidence.
The judges peppered the lawyers with questions.
Judge Stephen Williams asked Baine why evidence of abuse is needed if the rule helps promote "just and equitable principals of trade" in the municipal market, a statutory basis for SEC approval of a rule.
Baine said the government is compelled to show that it cannot promote this through some less restrictive means.
Judge Judith Rogers asked Lorne if the SEC and MSRB should establish evidence of abuse.
"We are dealing with a self-regulatory organization comprised of experts within the industry" who are concerned about abuses, he said.
Judge Williams asked Lorne if the investor should care whether the underwriter got the bond business because of political contributions or golf games with a municipal finance professional.
"The role of the underwriter is in many ways to represent the investors in the underwriting process, to address such concerns as the financial condition of the issuer, he said. Political contributions cause "a corruptive environment" because there is no longer a necessary tension between the underwriter and the issuer, he said.
Each of the parties to the case said after the hearing that they will consider appealing an unfavorable decision.
