A joint venture headed by a minority-owned investment bank has sued the U.S. Department of Education over the selection of a designated bonding authority for a financing program to aid historically black colleges and universities.

In a lawsuit filed Sept. 19 in the U.S. District Court for the District of Columbia, San Francisco-based Grigsby, Brandford & Co. and A.H. Williams & Co. of Philadelphia called Education Secretary Richard W. Riley's selection of Pryor, McClendon Counts & Co. unlawful, and said it was "arbitrary and capricious, lacking a rational basis and an adequate statement of reasons."

The suit sought a temporary restraining order to prohibit the education department from signing a contract naming the Atlanta-based Pryor McClendon as the designated bonding authority for the financing program and from entering into an agreement to insure any bonds issued under the program.

The lawsuit also asks either for a judgment in favor of the joint venture -- the suit says the venture's proposal "was recommended first under the governing criteria"- or a reconsideration of the three finalists' proposals.

A hearing on the issue is set for Oct. 31. Grigsby Brandford and Pryor McClendon are minoritowned investment banks. A.H. Williams is not minority-owned.

On Sept. 20, U.S. District Court Judge Gladys Kessler signed an order prohibiting the education department from finalizing its agreement with Pryor MCClendon. During a hearing that day, Grigsby Brandford withdrew its request for the restraining order after the Education Department said it would not finalize the contract with Pryor McClendon until the lawsuit had been resolved.

Kessler's order is set to expire on Oct. 31.

Officials at Grigsby Brandford and A.H. Williams could not be reached for comment.

Officials at the Department of Education and at Pryor McClendon declined to comment on the lawsuit.

The Historically Black College and University Capital Financing Program was approved as part of the 1992 reauthorization of the Higher Education Act of 1965. Section 704 of the act gave the Department of Education the authority to create the program, designed to help historically black colleges and universities gain access to the capital markets. The plan provides a federal government guarantee of up to $357 million for taxable bonds issued under the program.

On May 31, the Education Department issued a request for proposals for firms interested in being the designated bonding authority for the capital financing program. The designated bonding authority will be authorized to issue federally guaranteed bonds and to use the proceeds to provide loans to the schools. The bonding authority would also be responsible for the administration of a escrow account that will serve as a debt service reserve fund for loans made by the program. The entity would be empowered to charge the schools up to 2% above the interest rates on the bonds in exchange for providing the loans.

Eleven firms submitted proposals by the June 30 deadline; eight were considered valid.

Grigsby Brandford, Pryor McClendon, and M.R. Beal & Co. were the three finalists for the designated bonding authority slot. After submitting written proposals for how they would direct the program, the firms were summoned to Washington on Aug. 11 to present oral arguments.

In a letter dated Sept. 7, Steven J. Pappas, director of the division of higher education incentive programs for the Department of Education, informed Calvin Grigsby, president and chief executive officer of Grigsby Brandford, that Riley had chosen Pryor McClendon to serve as the designated bonding authority.

The letter contained no explanation of how the decision was made.

Pappas did not return calls yesterday.

In court papers, Grigsby Brandford & A.H. Williams allege that their proposal was ranked first among the finalists by three of the five review panel members directed to make a recommendation to Riley.

The panel consisted of outside "expert consultants," according to Reed Saunders, director of higher education programs at the Department of Education.

The panelists were: Forrest M. Cason, a public finance vice president at Kirkpatrick Pettis; Katherine Engebretson, former treasurer of Philadelphia and now with Miller, Anderson and Sherrerd, an investment bank; Ron Oleyer, deputy for management in the office of the chief financial officer for the Education Department; Thomas Queenan, deputy treasurer of Philadelphia; and William Sprigs, director designate of the National Committee for Employment Policy.

According to the court papers, after the recommendations were submitted to Riley, the secretary met with "a group of politically appointed officials" and Pryor McClendon was selected.

"On information and belief, none of the Department of Education persons at the meeting -- including the secretary -- had read any of the detailed proposals of any of the three finalists and the only documents before the secretary were the recommendation memorandum" and the financial adviser's recommendations, Grigsby and A.H. Williams claimed.

The plaintiffs also alleged that the education secretary failed to follow correct procedures for soliciting requests for proposals because he did not publish a notice in the Federal Register.

Riley is not bound to follow the recommendation of the review panel, and it is unclear what factors moved the decision in Pryor McClendon's favor.

Washington sources said one possible answer is that Pryor McClendon had secured the involvement of minority-owned architectural and construction firms in the building of facilities to be financed by bonds issued through the program.

Some of the selection requirements in the request for proposals included minority ownership, the ability to manage a large issuance of debt, past performance on previous federal contracts, ability to address the special needs of minority business, an earlier record in using minority businesses, and no conflict of interest.

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