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Part 3: Conflict-of-interest concerns raised about advisers in bond deals

Posted Tuesday, Dec. 21, 2010  comments  Print Reprints
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Brown, Pruitt, Peterson & Wambsganss isn't the only longtime counsel on conduit bond deals by Tarrant County's public corporations. Tarrant County has another public corporation, the Housing Finance Corp., where two of the city's legal powerhouses -- Kelly Hart & Hallman, and Fulbright & Jaworski -- serve as co-bond counsels.

The roles are somewhat different, as is the corporation.

With the Housing Finance Corp., the county commissioners are the board members and the projects are in the county. And overall, the housing deals it has approved are peanuts compared with Tarrant's approvals for assisted-living centers, nonprofit hospitals and other facilities through the Cultural Education Facilities Finance Corp. and the Health Facilities Development Corp.

The county has not asked about the fees earned by the two counsels for the Housing Finance Corp. But Dan Settle, an attorney for Kelly Hart & Hallman, said the fees for bond attorneys and other costs associated with issuing the bonds is capped at 2 percent of the bond proceeds. For example, the cap would be $2 million on a $100 million bond package.

But projects helping indigent and vulnerable communities, such as many of those by the Housing Finance Corp., tend to draw lower fees, and Settle said his law firm works with borrowers to shave borrowing costs.

"The fee depends on the structure and complication, how complex the project is," Settle said. "But you have to reduce your fee to less than what you would have liked to charge if it is a worthy project."

In housing, the bulk of the county's recent work has involved single-family projects, he said. Those fees tend to be lower, even though the work is extensive.

"In those, we can't charge what the work demands," he said.

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Third of four parts

For decades, Tarrant County has relied on attorney C. Harold Brown to be the go-to man for its multibillion-dollar conduit bond business.

Borrowers and bond attorneys all over the state have flocked here because of Brown's reputation for making deals work. With his knowledge of a complex area of the law, Brown is gatekeeper for every bond issued by two public corporations on behalf of the county.

"Harold makes sure that all the i's are dotted and t's are crossed," County Judge Glen Whitley said.

But Whitley and Commissioner Gary Fickes had to do damage control after a local deal being struck by Brown's law firm -- Brown, Pruitt, Peterson & Wambsganss -- blew up in a local community. Residents raised questions of conflicts of interest.

"There were a lot of things said," Fickes said. "A lot of allegations were made."

A deeper issue, according to some experts, is the degree of control Brown and his firm have over the county's conduit bond business. The county has given the firm virtual carte blanche: Tarrant has no formal agreement with Brown, doesn't ask questions about what he is paid and automatically approves deals near and far.

Brown's firm is the issuer's counsel for the Tarrant County Health Facilities Development Corp. and Cultural Education Facilities Finance Corp. Brown reviews documents associated with the bond deals. He makes sure that the county isn't liable if bond payments aren't made.

In another role, Brown is secretary of both corporations. He schedules meetings, keeps minutes, holds hearings in his law offices. He also makes presentations to County Administrator G.K. Maenius and, if asked, responds to questions at commission meetings on the deals.

In addition, in the rare event that any member of the corporations' boards steps down, Brown has sometimes recommended whom commissioners should appoint as replacements.

He is also a regular contributor to county commissioners' political campaigns, among other candidates he supports.

Influence by some advisers in bond deals is likely to be among the subjects discussed by federal officials who have begun scrutinizing the municipal bond market. Concerns are the potentially conflicting roles of some advisers, as well as political contributions by those who might try to sway government deals.

"It goes to the root of the relationship between the private-sector parties trying to get business with elected officials," said Ernesto Lanza, general counsel for the Municipal Securities Rulemaking Board, which aims to write investor protection rules.

"There's no reason to think the same pressures also would not exist among other entities trying to get contracts with state and local governments," Lanza said. "We have a lot of anecdotal evidence of people saying there's a lot of pay to play."

Undisclosed fees

Commissioners have not asked about the fees that Brown's firm earns as issuer's counsel because the borrower pays them. "That's a deal worked out between the other entities," Whitley said.

Brown won't disclose the amount, but he said it is a flat fee worked out with the bond counsel and borrower.

He has no written contract or agreement with the county's corporations to be issuer's counsel, according to the Tarrant County district attorney.

No contract is required, Brown said, because the bond deals are independent of one another and attorneys negotiate fees individually. Brown also said that there is no conflict with his working as both secretary and issuer's counsel because he is not a voting member of the boards. "We have no vote at all, no," he said. "All we're doing is scheduling a meeting and taking minutes of that meeting."

Brown said that as issuer's counsel he's not a municipal adviser.

Others say that Brown's role with the board responsible for endorsing the deals is an issue because only he has in-depth knowledge of the bonds. Though the boards have included CPAs and bankers, they have also had a member in her 80s and another with multiple bankruptcies, records show.

Brown's firm gets paid when bonds are issued.

Several bond attorneys say they probably wouldn't be involved in such an arrangement because it could call into question their loyalty to the county versus their motivation to collect fees. They also said their insurance carriers would require them to bow out.

"If somebody asked me to do that, I would rather not," said Paul Martin, chairman of the public finance practice group at Winstead, one of the largest business law firms in Texas. "I would want to avoid any appearance of a conflict."

Some lawyers suggest that in cases with concurrent representations of multiple clients, conflict-of-interest waivers should be signed by clients and disclosed to investors.

"Everyone needs to be paying attention, and so everyone needs their own counsel to look at what's going on," said Meredith L. Hathorn, a Louisiana bond counsel who specializes in ethics rules. "It's like a divorce. You want your own attorney, and the other person needs their own attorney."

Securities and Exchange Commission officials say advisers should serve in only one capacity.

Campaign contributions

Brown has also boosted county commissioners' campaigns for years, with typical donations of $1,000 a pop for each. Brown said he has long been a supporter of many a cause and many a political candidate. "I think if a person is doing a good job I would rather see that person I know is doing a good job than somebody else," he said.

Federal regulators are talking about expanding rules barring contributions by some advisers in bond deals, Lanza said. Underwriters are allowed to give up to $250 contributions only to the campaigns of candidates for whom they are entitled to vote. Otherwise, any underwriter who contributes is prohibited for up to two years from doing business with the governments.

Other advisers in bond deals could also influence government officials, Lanza said.

"This is not about directly buying the business," Lanza said. "This is about more of the kind of pay-to-play concept of 'If you want to be on the good list of people whom we might pick, you have to prove you are our friend.'

"Our feeling is that this is not the way to pick a professional," Lanza said. "The MSRB board felt it was important to act on that front."

It's not clear, however, whether such a rule would apply to an issuer's counsel.

'Clearly a conflict of interest'

The deal that blew up with Brown concerned an overlap of alliances.

A senior partner in Brown's law firm -- former Southlake Mayor Andy Wambsganss -- and another attorney from the firm -- Michael Forman -- wrote to Southlake officials touting a project that had been approved for up to $60 million in conduit bonds from the Cultural Education Corp.

Forman had also helped the organization that sought the bonds, Lifestyle Center of Southlake, incorporate as a nonprofit, state records show.

Forman later wrote the mayor to provide information about the project, which was proposed by developer Visions Southwest.

At the time, the city was considering whether to approve the development.

With the law firm as issuer's counsel, that created a conflict of interest, Fickes said.

Fickes said he and Whitley met with Brown to discuss the issue. "An entity doesn't need to be involved on the other side of any issue, whether it's this or any other," Fickes said. "That's clearly a conflict of interest."

Brown said he stopped the involvement when he heard about it.

"As I understand, we have an office in Southlake and attorneys out there, I think, did some work for them but then we found out we have a conflict of interest here," he said. "Yes, that was not a good idea."

As a general rule, it's best to avoid any perception of conflicts, several bond experts said.

"If somebody is recommending that a governmental body take some action and the result of that action is going to be a benefit to him where he's wearing a different hat, that doesn't necessarily pass the sniff test," said Bill Blitch, a Houston financial adviser who has worked on dozens of conduit bond deals.

Hathorn said situations that create overlaps may need to be addressed. "If something goes wrong, boy there's going to be a lot of Monday morning quarterbacking, and you always need to ask yourself how multiple representations will be viewed in hindsight and how will it be viewed by Main Street," she said.

The original Southlake project was withdrawn after criticism by residents. Recently, the city approved Visions Southwest's new plan for a hospital and office building on the site.

Research librarian Cathy Belcher contributed to this report.

Yamil Berard, 817-390-7705

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