DENVER -- A Salt Lake City law firm hired by the Utah School District Finance Cooperative disputed a state report that recommends that the cooperative no longer keep Dougherty, Dawkins, Strand & Bigelow Inc. as its exclusive underwriter.

Last week, the office of the legislative auditor general recommended that the school district cooperative allow its members to choose their own underwriters and bond counsel and to decide between a negotiated or competitive underwriting process for their financings.

Since the program started in 1991, $1.1 million has been distributed to school districts by the cooperative. The cooperative manages a loan pool and distributes the profits from the pool to members when they issue bonds.

By requiring that school districts use Dougherty Dawkins and the law firm of Chapman & Cutler in order to receive subsidies from the cooperative, the cooperative shows "favoritism" towards the firms and may not represent the best interests of the member school districts, the study said.

But a seven-page letter to the office of the legislative auditor from Robert S. Prince of Kirton, McConkie & Poelman, the law firm hired by the cooperative, stated, "We do not... share your conclusion that the cooperative could do a better job of protecting the interests of its member districts through the introduction of more competition into the process of selecting a bond underwriter and bond legal counsel in the subsidy program."

Legislative auditor general Wayne Welsh recommended in his report that the cooperative's board introduce a more competitive underwriter and bond counsel selection process, that school districts be allowed to choose for themselves the method of structuring a deal, that awards be made without regard as to how school districts issue their bonds, and that the cooperative and school districts "avoid entering into exclusive arrangements that might lead to inferences of impropriety or favoritism."

Dougherty Dawkins and Chapman & Cutler devised and developed the loan pool program for the cooperative.

In his letter, Prince argues that the cooperative requires Dougherty Dawkins and Chapman & Cutler be used "based on not only a feeling of loyalty and trust arising from past services to the cooperative, but also on significant value added and actual, substantial economic benefits to the cooperative members."

Prince said the report relies too heavily upon criticisms lodged by Dougherty Dawkins' competitors. The report acknowledges only that other firms were interviewed.

"Now that the concept has been implemented and is providing the benefits which were envisioned, other competitors are making a belated effort to force their way into benefiting from the efforts of the cooperative and its financial advisors. The analogy of 'The Little Red Hen' readily comes to mind," Prince wrote.

Prince also criticized the report for not being a full audit of comparable issuance costs.

In response to Prince's letter and his comments that the report did not produce any unethical or illegal behavior, the auditor general said, "While it is true that we did not find any evidence of fraud or inappropriate activities in our review, it is important to emphasize that our review was a very limited scope survey, not a full audit ... therefore our statement should not be interpreted as an endorsement of the subsidy program."

The auditor's response went on to say that the cooperative has not demonstrated that it saves school districts money by forgoing competitive deals.

Richard Stowell, associate executive director of the cooperative, said the cooperative's board won't meet again until September. At that time, the 20-member citizen and school district representative board will take up the legislative auditor's report.

Stowell continued to depict the issue as infighting between competing municipal bond firms. He said the charge that the cooperative was favoring Dougherty Dawkins and Chapman & Cutler "is not worth responding to."

"We think the way we've done business is how it goes on in the world. Working with somebody over time is to our benefit," Stowell said.

Separately, Larry Denham, vice president and manager of Smith Capital Markets in Salt Lake City, said that his comment in yesterday's issue of The Bond Buyer about responding to the auditor general's questions should not be interpreted to mean that Smith Capital instigated the legislative auditor's report, or that his firm was at odds with Dougherty Dawkins.

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