DALLAS -- The Texas attorney general's office has refused to allow a state agency to hire its first choice as bond counsel because of an earlier fee dispute with one of the firm's lawyers.

In an unprecedented action, First Assistant Attorney General Will Pryor last week declined to approve the Dallas firm of Jenkens & Gilchrist as counsel for two upcoming sales by the Texas Public Finance Authority, which selected the firm.

Instead, Mr. Pryor approved Akin, Gump, Strauss, Hauer & Feld of Dallas, the authority's backup choice. He gave no reason for the decision.

The move struck authority board member Harry Whittington as high-handed. "I do have a problem with them picking the bond counsel," the Austin lawyer said. "There should be a reason, at least."

Mr. Pryor outlined his feelings about appointing Jenkens & Gilchrist and one of its bond lawyers, Allen Moon of Dallas, in a July 15 letter to the authority.

"I would not expect to approve any outside bond counsel with a history of difficult relations with this office or other state agencies involved in the bond issuance or approval process," Mr. Pryor wrote.

In an interview Friday, Mr. Pryor said he has assured the firm his decision is not permanent. "Although some might perceive it as a personal issue, it's not. I just think the timing is wrong," he said. "We have no intention to blacklist firms."

Mr. Moon said he would discuss the move to exclude Jenkens & Gilchrist with the firm's senior management, but declined further comment.

Aware of Mr. Pryor's feelings, the authority met on July 17 and voted 2 to 1 to hire Mr. Moon's firm with the stipulation that Akin Gump be named bond counsel if Jenkins & Gilchrist were rejected.

Last Thursday, the Texas Bond Review Board approved a $2 million lease revenue deal and $22.9 million general obligation transaction with Akin Gump as bond counsel.

Assistant Attorney General Jim Thomassen, chief of the public finance section, said Friday that the decision to reject Jenkens & Gilchrist was based on past working relations with Mr. Moon, who joined the firm on July 1.

"It was our view that there were difficult relations with this office and the state agency while Allen Moon was working as their bond counsel," he said.

Specifically, Mr. Thomassen said his office proposed Jenkens & Gilchrist because of a fee dispute involving Mr. Moon, when he worked for the Dallas firm of Thompson & Knight as bond counsel to the Public Finance Authority.

In April, the Bond Review Board moved to block a $43,000 payment to Thompson & Knight after the issuer approved the additional payment for bond counsel work.

The state argued that the payment would exceed a fee cap previously agreed to by Thompson & Knight, and the payment apparently was never made. However, Mr. Moon defended the additional payment, saying it was allowed by his firm's agreement with the authority.

Glen Hartman, executive director of the authority, said the bond review board raised questions during its July meeting about proposed fees on bids submitted by Jenkens & Gilchrist, Akin Gump, and Vinson & Elkins of Houston.

Each firm proposed hourly rates and fee caps, but in the original bidding, Jenkens & Gilchrist had the highest overall fee structure, he said.

Despite that, Mr. Whittington supported rehiring Mr. Moon because he felt that the fee would be the lowest overall.

"Our experience with Allen Moon is that he has always come in under the cap, and he had done these same issues before," he said.

After the firms rebid, Jenkens & Gilchrist and Akin Gump had identical fee caps of $26,500 for the two issues.

The April fee dispute was not the first split between Mr. Moon and state officials. In August 1990, he was involved in advising the authority to declare one of its bond issues in technical default -- a move disputed by policymakers.

Mr. Thomassen denied that the decision would preclude Jenkens & Gilchrist or Mr. Moon from actively bidding on future bond issues by any state agency.

"I think this was a specific decision on a specific contract," he said. "If they sought other [transactions] I'm sure Mr. Pryor would give it a fresh review."

One lawyer, who declined to be identified, questioned how much discretion the Texas attorney general's office can exercise. He argued that its role is traditionally to decide if an outside counsel is needed, not to choose which firms are used.

But Chairman Marc Stanley of the Public Finance Authority disagreed.

"I'm comfortable with the fact that they have the authority to tell us," said Mr. Stanley, a Dallas lawyer. "I'm comfortable with their decision."

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