LOS ANGELES -- Investment bankers have asked the Los Angeles city attorney to review the legal rationale for selling a convention center refinancing competitively, saying the decision is in error and may expose the city to a lawsuit.
Such a review should confirm previous findings by city staffers, "namely that, based upon the size and complexity of the transaction, a negotiated sale approach is valid and in the best interest of the city, " wrote Nelson E. Brestoff, a partner with the law firm of Radcliff, Rose & Frandsen, in a nine-page letter to James K. Hahn, the city attorney.
Brestoff told Hahn he wrote the letter on behalf of the securities firm of Grigsby Brandford & Co. to provide "our analysis of the legal justification for the negotiated sale of certificates of participation by the [Los Angeles Convention and Exhibition Center] Authority, as opposed to the solicitation of sealed competitive bids."
The Los Angeles City Council Finance Committee' voted last week to pursue a competitive sale, despite underwriters' complaints that the city failed to show the move would produce at least the same amount of savings as from a negotiated sale.
Prior to the vote, the city's administrative officer, Keith Comrie, and outside financial adviser Public Resources Advisory Group reversed their earlier recommendations favoring a negotiated sale.
J. David Rush, Public Resources' president, told the committee that a recent tax-exempt rally and other favorable market developments convinced his firm that the city could now undertake a $400 million refinancing on a competitive basis at no additional cost when compared to a negotiated sale.
But Brestoff questioned the logic of this conclusion.
Up through June, "there are findings here, twice," by the city attorney and others that a negotiated sale was in the city's best interest, Brestoff said in an interview Friday.
Those findings reflected the size and complexity of the transaction, "not market conditions which are always changing," Brestoff told Hahn in the letter.
The finance committee focused much of its attention on a Los Angeles charter requirement that calls for competitive debt sales unless it can be demonstrated that it is in the city's financial interests to sell on a negotiated basis.
Brestoff, however, believes Hahn should revisit a 1985 report by the city attorney's office. That report, which discusses the legal requirements applicable to the manner of sale for certificates of participation, may have inadvertently concluded that such sales are subject to the city charter, Brestoff said.
By contrast, Brestoff said in the letter, his analysis suggests there is "clear authority for the negotiated sale approach taken by the authority, and legal justification under the charter for the authority's selection of the underwriting team."
The authority in May voted 10 to 1 to appoint Grigsby Brandford as the bookrunning manager.
A review committee had recommended Goldman, Sachs & Co. for that slot, so the authority's vote triggered a war of words between the firms as they tried to influence the City Council, which also must approve the transaction.
The full City Council is scheduled tomorrow to take up the convention center refinancing on its agenda. Brestoff expressed hope in the letter that Hahn could review the pertinent legal issues "on an expedited basis. "
Brestoff's legal analysis hinges on the fact that the city and authority are separate legal entities. He concludes the authority is expressly authorized to sell certificates of participation at a negotiated sale, adding that the city charter provision governing competitive sales does not apply in this instance because of legal exceptions.
Brestoff stressed that he does not challenge the city's power to reject any transaction assembled by the authority.
"They're ultimately paying the bill" and can decide not to go forward with the deal if it does not make economic sense, Brestoff said in the interview. But he said "that's different" than the issue of whether the city can also overturn the authority's decision to pursue a negotiated sale.
Brestoff says the city attorney's office should go back to its 1985 report on the grounds that the report fails to recognize authority granted under the state's Marks-Roos Local Bond Pooling Act of 1985.
This act gives an entity such as the authority express authorization to sell certificates of participation at a negotiated sale, Brestoff argues, adding that the city's 1985 report inappropriately concludes that the sale of the rights under the lease by the authority constitutes a contract that is subject to the city's charter.
Brestoff further contends that the charter provides an exception to the competitive bidding requirement when the city is the lessee, an arrangement that Brestoff says exists in the case of the convention center.
Brestoff's letter says the city attorney's 1985 report also fails to take into account a court-recognized exception to competitive bidding requirements that may apply in this situation. He also concludes that other city policies may favor a negotiated sales approach.
"Finally, it appears that the council's policies of working with California-based firms, and providing greater opportunities for minority-owned firms, militate against nullifying the underwriter selections made by the authority," Brestoff said in his letter.
Besides questioning whether the city is justified in switching to a competitive bid approach, Brestoff also suggests in the letter that "such a switch may expose the city and authority to liability."
In the interview, Brestoff said this liability could stem from a legal theory that there has been "interference with a prospective economic advantage," given that Grigsby Brandford had been selected and approved by the authority after a lengthy review process.
"The law is not abundantly clear" in this area, Brestoff said, adding there might be potential "exposure to a lawsuit" given the facts surrounding this situation.
Pete Echeverria, an assistant city attorney, said Friday that he had not had a chance to review Brestoff's letter.
Copies of the letter were sent to all City Council members and the authority, as well as to Los Angeles administrative officer Comrie, Mayor Richard Riordan, and Controller Rick Tuttle.
In a letter last week to Zev Yaroslavsky, the chairman of the Finance Committee, Goldman Sachs also expressed concern about the competitive sale approach, and specifically disagreed with Public Resources' recommendation.
"We believe that the city will pay a higher total borrowing cost for an advertised sale than a negotiated sale due to the loss of structure and timing flexibility," wrote Kevin Scott, a vice president with Goldman Sachs.
Underwriting firms that competed vigorously for the coveted underwriting slots have been allies of sorts in recent days, uniting against the recommendation for a competitive sale.
One notable exception is Bank of America, which recommended selling the certificates through a competitive bidding process after the authority's May 12 vote. The review committee had recommended the bank as a co-senior manager, but the authority appointed it as a co-manager.
In response, Bank of America withdrew its name and questioned the fairness of the selection process. Some competitors dismissed the bank's stance as "sour grapes," but Yaroslavsky said at last week's meeting the bank "showed a lot of guts" to take the position it did.