ATLANTA -- West Virginia's attorney general has refused to sign off on the choice of Donaldson, Lufkin & Jenrette Securities Corp. as lead manager for a state School Building Authority refunding issue, citing a link between the firm and the Bill Collins extortion trial in Kentucky.
In a four-page letter dated Oct. 15, deputy attorney general Dawn E. Warfield informed state purchasing division director Ron Riley that she had decided to return contracts pending between the school authority and Donaldson following discussions with attorney general Darrell V. McGraw Jr.
"Of particular interest and concern to us," Warfield wrote, "are reports that the proposed underwriter here, Donaldson Lufkin & Jenrette, was named in a federal extortion trial involving bond issues for the state of Kentucky.
"I am certain that neither you, nor the office of the Attorney General, wishes to approve a transaction or transactions which could potentially involve criminal activity under W.Va. Code 5A-3-31 or related federal statutes, without exercising diligent cautionary review.
"Therefore we wish to confirm that State purchasing practices have been applied to your satisfaction to ensure the integrity of the selection process."
In her letter to the purchasing director, Warfield cites an Oct. 14 article from The Charleston Gazette as the source of her information about the relationship between the Collins trial and Donaldson Lufkin. The article quotes extensively from reports filed by The Bond Buyer on the Frankfort, Ky. trial.
A spokeswoman for Donaldson said yesterday, "We have furnished the school authority with information that DLJ's role in the Collins trial was as a witness and that they were not accused of any wrongdoing. this information should be sufficient to meet the [attorney general's] concerns on this matter."
Bill Collins, the husband of former Kentucky Gov. Martha Layne Collins, was found guilty last Thursday in a Frankfort federal court of one extortion count and a related tax fraud charge. He had been 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.
During the period, Donaldson, whose executives invested a total of $1.2 Million in collins horse partnership, became bookrunners on Kentucky state bond deals totaling $500 million.
Warfield also objected to the School Building Authority's proposed contract with Donaldson on other grounds, including what she characterized as Donaldson's use of a portion of the authority's debt service reserve fund as a potential source of revenue to calculate present value savings on the refunding deal.
This, Warfield said, ran contrary to an opinion expressed by the authority's counsel, Goodwin & Goodwin. The law firm had offered an opinion that proceeds from the refunding bond issue could be used only to retire outstanding indebtedness, she said.
"This impermissible factor may have been significant in light of the closeness of the bidders on other evaluation criteria," Warfield said.
In addition, the deputy attorney general faulted the proposed contract with Donaldson for not specifying what the state would pay for services provided.
"Depending upon the structure of the transaction and whether or not co-managers are used, the estimated fee to be paid to DLJ could range from $ 1,159,233 to as much as $1,630,065 -- a difference of almost one half million dollars to be shared with unknown parties," Warfield said.
Clacy Williams, the authority's executive director, said yesterday that he was working with the state purchasing division to respond to each of Warfield's concerns.
"Purchasing is preparing a response that I think will increase
Williams defended the authority's selection of Donaldson at its Sept. 24 meeting. He said the firm was chosen over four other finalists for the $150 million refunding because it proposed the greatest present value savings and the lowest issuance cost. He said that Donaldson had not been charged in the Collins case and that the guilty verdict does not implicate the firm in wrongdoing.
Riley, the purchasing director, was not available for comment yesterday.
Warfield also returned contracts pending between the school building authority and two law firms, citing concerns about the selection procedure. The authority had proposed Charleston, W.Va-based Goodwin & Goodwin as bond counsel on the refunding deal and Steptoe & Johnson, which has an office in Clarksburg, W.Va., as issuer's counsel.
According to Warfield, the appointment of Goodwin & Goodwin as issuer's counsel was made despite a lower bid from Steptoe & Johnson.
"As a result, although Steptoe & Johnson submitted the lowest cost proposal for both contracts, the firm was not even considered as bond counsel," Warfield wrote in the letter to Riley.
Warfield also characterized as "unusual" a provision in the managers' agreement that Donaldson hire the Charleston law firm of Bowles, Rice, McDavid, Graff & Love as underwriter's counsel.
"An objective justification for this provision is necessary to avoid the appearance of favoritism, as the State, directly or indirectly, is funding these legal services," she wrote.
Warfield also said that in the case of each of the proposed contracts, the school building authority proceeded in a manner she characterized as involving "exceptions to established procedures."
Among those exceptions, she said, was a procurement method that used request for proposal from the school authority rather than from the state purchasing division, and the failure to identify members on the evaluating committee and to file competing proposals with the state auditor's office.
"Although we recognize that such matters lie within... you discretion as Purchasing Director, we would ask you to confirm that these exceptions to established procedures, designed to ensure the integrity and accountability of the bidding process, were not overlooked," Warfield said.
Under West Virginia law, before a state bond issue can be sold, it must first be reviewed and approved by both the purchasing division and the attorney general's office.
This is not the first time that West Virginia's attorney general has resisted the choice of Donaldson as an underwriter on School Building Authority bond issues.
Most recently, a McGraw aide objected in June when Donaldson was designated lead underwriter for a school authority deal that combined an envisioned $150 million refunding issue with a plan to sell about $190 million in new-money bonds. The aide said that there was no contract bid between the state and Donaldson.
After that choice, both issues were postponed following a lawsuit challenging the school authority's legal right to issue annual-appropriation-backed bonds. The state Supreme Court found for the plaintiffs in a July ruling that banned future new-money sales of such bonds unless voters approve them or a dedicated revenue source is found.
However, the court said that the ruling does not apply retroactively to debt already issued by the authority, or to future refunding bonds.
