ATLANTA -- West Virginia's purchasing director last week backed the choice of Donaldson Lufkin & Jenrette Securities Corp. as bookrunner for a state school bond refinancing issue following concerns from the state attorney general's office about the selection.

The previous week, Deputy Attorney General Dawn Warfield had written a letter to the purchasing director, Ron Riley, that raised questions about a pending contract between Donaldson Lufkin and the school authority.

In particular, Warfield had cited the recent extortion trial in Kentucky at which officials at the investment bank had been witnesses. She also questioned details of the process that the authority had followed in choosing its bookrunner, bond counsel, and issuers counsel.

In a letter dated Oct. 19, Riley wrote Warfield that he saw no problems with Donaldson as the lead manager of the bond issue.

"We believe that all policies and procedures were followed, otherwise we would not have approved them," Riley wrote in a point-by-point response to Warfield's letter.

Addressing the issue of the Kentucky trial, Riley said: "[Neither] Purchasing nor the SBA [School Building Authority] is in the position to disqualify DLJ for the allegations

on their actions in Kentucky.

"Should the SEC suspend DLJ from further bond sales, then Purchasing will work with the SBA to select another qualified vendor from the bids received on Sept. 20, 1993. If you have any knowledge of any improprieties by state offices or vendors related to this procurement, please advise us immediately so we may take further action."

Bill Collins, the husband of former Kentucky Gov. Martha Layne Collins, was found guilty on Oct. 14 in a Frankfort federal court of one extortion count and a related tax fraud charge. He was accused of forcing Donaldson Lufkin and another firm, Cranston Securities Co., to make political contributions and invest in a horse partnership business in exchange for state bond business between 1983 and 1987, his wife's term of office.

Richard Whitney, a Donaldson Lufkin senior vice president, said Friday, "We feel that the letter responds very fully to the concerns of the attorney general."

"DLJ is very proud of its work in West Virginia and we feel we won in a very competitive underwriters' selection process," Whitney said.

Henry Marockie, the School Building Authority's president, said Friday, "The purchasing director has certified that we followed all the appropriate procedures in our selections [for the the school bond refunding). This should clarify the situation."

Neither Warfield nor other officials at the office of state Attorney General Darrell V. McGraw Jr. were available for comment.

Marockie said that despite Riley's letter, he expects there to be some delay in the sale of the refunding bond issue because of an unrelated lawsuit filed last week seeking to clear the way for an upcoming new-money bond issue being planned by the authority.

"Right now my feeling is to wait for the clouds to clear on this lawsuit before going forward with the refunding as well," Marockie said.

The new-money issue was made possible by legislation passed last week that permits the authority to sell about $180 million of sales tax-backed debt held up by the state Supreme Court this summer. The high court banned future new-money sales of the authority's bonds unless voters, approve them or a dedicated revenue source is found.

The lawsuit, Marockie said, will attempt to validate the use of the sales taxes as security for the new-money issue.

In his letter to Warfield, Riley also addressed questions raised by Warfield about Donaldson's proposed use of the school authority's debt reserve fund in the refunding deal. In her letter, Warfield had characterized Donaldson's proposed use of the reserve fund as contrary to an opinion expressed by then-issuer's counsel Goodwin & Goodwin.

"There appears to be a misunderstanding of the issues involved," Riley wrote. "What Goodwin & Goodwin suggested was that no proceeds from the refunding bond issue could be utilized for school construction projects. DLJ was not suggesting use of the proceeds, but rather potential use of the Debt Service Reserve Funds. These are two distinctly different sources of money."

In addition, Riley said he could not find fault with Donaldson's selection of underwriter's counsel. Warfield suggested that the investment firm's choice of a Charleston law firm required "objective justification."

"Regarding DLJ's choice of Bowles, Rice, McDavid, Graff & Love, the SBA does not participate in the selection of an Underwriter's Counsel," Riley wrote.

Speaking of the school authority's choice of Goodwin & Goodwin as bond counsel and Steptoe & Johnson as issuer's counsel, Riley wrote, "When reviewing the evaluation of the bids for Bond and Issuer's counsel, please note that the RFP specifically stated that one firm would not be chosen for both bond and issuer's counsel. As such the SBA was justified in selecting Steptoe & Johnson for issuer's counsel, since they were the low bidder at $15,000."

According to Warfield, the appointment of Goodwin & Goodwin as bond counsel had been made despite a lower bid from Steptoe & Johnson for the same job.

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