DENVER -- The Utah legislative auditor has recommended that the Utah Finance Cooperative Board sever its exclusive underwriting relationship with Dougherty, Dawkins, Strand & Bigelow Inc.

Stating that the cooperative could "better protect the interest of member school districts," the legislative auditor recommended using a more competitive process for school districts issuing debt through the $53 million state loan pool.

Last year, in part because of the loan pool cooperative, Dougherty Dawkins served as senior manager for $209 million of bonds in Utah. Securities Data Co. ranked the firm second in the state behind Goldman, Sachs & Co., which was first with $1.32 billion. Goldman is a major underwriter for power cooperatives in the state.

"This finance cooperative has granted Dougherty Dawkins an exclusive underwriting relationship. We disagree with the exclusionary arrangement," said Kent Beers, performance audit supervisor with the office of the legislative auditor general.

Scott Robertson, senior vice president in Dougherty Dawkins' Salt Lake City office, called the report, which was released late Thursday, "unfair," while Robertson's competitors voiced their approval.

Denver and Salt Lake City bankers observing the situation depicted it as typical among competitors in the municipal bond market.

Dougherty Dawkins executives grumbled privately that other firms were using the audit as a way to take away Dougherty Dawkins' school business in Utah.

Larry Denham, manager of Smith Capital Markets, a major Utah investment banking firm, said his firm was interviewed by state auditors.

"We've had a chance to sit down and talk with them and shared our thoughts and feelings, and that report reflects those," Denham said. "There's a tough competitive environment here and it's complicated when you have these kinds of arrangements."

Richard Stowell, associate executive director of the Utah School Districts Finance Cooperative, said the audit stemmed from the influence of Dougherty Dawkins' competitors. Furthermore, the fact that the audit did not produce any evidence that spreads under the program were higher than comparable issues' led Stowell to believe his board may well decide to retain its relationship with Dougherty Dawkins.

"There's a lot of internal fighting [between investment banking firms], it appears to us," Stowell said. "The audit clearly reflects we haven't broken any laws. The report is very inconclusive in that they haven't done any comparative studies. There's no teeth in it."

Stowell went on to say that his board will "probably look carefully before they make any changes in their operation."

Denham pointed out that not all school districts use the cooperative's subsidies. Several major school districts use the sealed bid competitive form of issuances.

But many take advantage of the loan pool, which comes in the form of a subsidy. Since the program started in 1991, $1.1 million in subsidies has been handed out to school districts to offset their borrowing costs, the audit showed.

The program's roots are in a 1988 formation of a hedge fund by the cooperative. The cooperative issued $200 million of municipal bonds at 8.75%, with the idea that if interest rates rose, schools could use the fund for borrowing purposes. Rates plummeted instead and the fund was worthless.

In 1991, Robertson and his firm devised a plan to retire $53 million of the pool and reissue the money in taxable bonds at 5.4%. Because interest rates have risen since then, the cooperative has been able to remarket the bonds at market rates and earn a profit estimated at $5.8 million spread out over several years. Some profits paid for a new building for the cooperative and others to subsidize school offerings. Further remarketing profits will subsidize future offerings.

If a school district wants a subsidy from the cooperative, the school district must use Dougherty Dawkins and the cooperative's choice of bond counsel for a subsidy to be granted.

The report said the cooperative makes such a requirement out of "loyalty to the investment banking firm and law firm that helped create the subsidy program."

The report said the cooperative "could better protect the interest of member school districts through the introduction of more competition into the process of selecting a bond underwriter and legal counsel in the subsidy program."

But the study went on to say, "We can not confirm or deny whether districts issuing bonds through the subsidy program pay higher issuance costs or higher interest rates," as critics of the program have charged.

Robertson of Dougherty Dawkins said he has consulted financial advisers who told him that his firm's spreads were not out of line. He said that if his firm charges higher spreads now, it is because spreads on earlier issues were lower in order to foster the program.

"This is clearly an attempt by competitors to get into deals where we were underwriters," Robertson said.

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