Money Is Muscle in Bond Sale Field : LANCER Project Shows Link Between Contributions, Contracts

In about three years, the 5,000 tons of household trash that Los Angeles City residents discard daily will be headed for a towering trash-burning plant in a South-Central Los Angeles neighborhood. There, the refuse will be turned into electric power.

To pay for that high-tech project known as LANCER, city officials approved the sale of $235 million in revenue bonds. And to sell those bonds, they have relied on a team of investment bankers that survived a fiercely competitive and controversial selection process.

The winning firms were among a dozen investment banking houses from New York, Philadelphia, San Francisco and Los Angeles that contended last year--along with their bond lawyers and financial advisers--for the job of marketing the LANCER bonds.

At stake were hundreds of thousands of dollars in fees and commissions, a choice contract in the growing resource-recovery field and a firmer foothold in the city’s bond business.

As it turned out, the victorious firms were the ones that displayed some skillful lobbying, boasted some of the best City Hall contacts and--over the last few years--donated the most money to the campaign funds of City Council members and to Mayor Tom Bradley.

It is not a process the financial firms relish.

“Suffice it to say that there isn’t a financial house in the country that has talked to me or to my staff which has not at one point or another complained about the LANCER experience,” said Councilman Zev Yaroslavsky, who chairs the council’s Finance and Revenue Committee.

‘Whispering Campaign’

Not all of the objections came from financial houses. City Administrative Officer Keith Comrie, in a rare display of pique, publicly denounced the atmosphere in which the LANCER contracts were awarded. Without naming them, he accused some investment bankers of excessive lobbying and engaging in “a whispering campaign” against rivals that ignored the professional qualifications of the bidding firms.

It was Comrie’s staff that joined with other bureaucrats and a financial adviser to review the initial proposals, interview applicants and make recommendations for awarding contracts. That screening committee ranked two Wall Street investment banks--Merrill Lynch Capital Markets and Salomon Bros. Inc.--as the two lead firms for the job. The panel also recommended the San Francisco-based firm of Grigsby, Brandford & Co. as the minority partner in the venture in compliance with a city policy to share municipal business with ethnic minority and women’s firms.

Yaroslavsky’s committee went along with the proposal. But Councilman Gilbert Lindsay, who chairs the Public Works Committee that oversees LANCER, balked at the recommendations.

Lindsay, in whose district the trash-burning plant will be built, became a prime mover in trying to replace Salomon Bros. and Merrill Lynch with two other firms--Smith Barney, Harris Upham & Co. and E. F. Hutton & Co. He also pressed for a third New York firm--Daniels & Bell Inc.--as the minority team of investment bankers.

One council member, who requested anonymity, recalled talking with Lindsay: “When he spoke about these firms, it’s interesting, he never said anything about their qualifications or merits. He just told me that these are the guys he wanted.”

In the final tally, the council in August, 1985, voted overwhelmingly, 11 to 3, for Smith Barney and E. F. Hutton, and split the ethnic minority portion of the LANCER business between Daniels & Bell and Grigsby Brandford. Councilman Richard Alatorre, who was sworn into office in December, was not yet a member of the council.

Record as Leading Firm

Some council members who voted for Smith Barney pointed to its record as the leading firm in dealing with resource-recovery programs across the nation and said E. F. Hutton had the track record and ability to market the bonds. They noted that Daniels & Bell was the first black member of the New York Stock Exchange.

A number of council members said later that they chose the recommendations of Lindsay over the screening committee of experts out of deference to Lindsay as a fellow member in whose district the LANCER plant is to be located. Furthermore, many said, they rejected the screening panel’s contention that Lindsay’s list of firms lacked California experience.

The council’s black members, along with aides for Mayor Bradley, also opposed Salomon Bros. because the firm’s parent company, at the time the LANCER bids were being considered, had an office in racially segregated South Africa and included a South African company as a major stockholder.

But other council members said the real turning point came in the council offices and hallways of City Hall where members were buttonholed by the nattily dressed bankers and their lobbyists. Council members and their staff were approached in committee meetings, besieged with telephone calls and invited to lunch. And the bankers and their allies could be seen huddling in the corridors and crowding into council members’ offices, the lobbyists thrusting their clients forward to meet personally with council members.

One banking expert who was new to the lobbying experience said he was amazed by the mobbing of the council members and the “backslapping and glad-handing” that went on outside council chambers at City Hall.

When Salomon Bros. executives learned that their position as one of the recommended firms was in jeopardy, they dispatched Santa Monica attorney Edwin Marzec to investigate. When Marzec arrived at City Hall, he sensed trouble.

‘The Lone Ranger’

“I was the Lone Ranger, and I came in very late in the day,” Marzec recalled. “My function was to find out what was going on. All I did was walk down the halls once and I could see immediately what was going on.”

What Marzec saw was a stream of bankers and their representatives in a lobbying parade, each trying to make the case for the home firm with quick oral presentations to council members wherever they could gain access--in their offices, in the corridors leading to the council chambers and inside the chambers during official sessions.

“I was appalled by the lobbying,” said Councilwoman Joy Picus, who voted to keep the original recommendations.

“I could barely get into my office, there were so many bankers waiting to see me,” added Councilman Michael Woo, who voted with the majority.

Among the most effective representatives for Smith Barney were company Vice Presidents J. Steven Rhodes, a former White House domestic adviser, and Ferd L. Harrison, a former head of the National League of Cities--who both had good relationships with council members, particularly key committee members.

Morgan J. Murray, Smith Barney’s executive vice president for public finance, said that those friendships and his firm’s campaign dollars promoted “good government” and were not responsible for winning the LANCER bond deal. But he said the company nevertheless considers access important.

“I don’t think there are any (firms) that are not political in this business. . . . If you expect to wait in your office and expect the mayor of Rochester to come to your office and seek you out, forget it,” Murray said.

Minority Representatives

E. F. Hutton’s prospects were enhanced by its team of minority representatives, which included Johnnie L. Cochran, Jr., a lawyer and city airport commissioner, and Ted Short, a financial consultant and former business partner of Councilman David Cunningham.

Cunningham argued forcefully for the winning firms on the council floor. Afterward, he denied that E. F. Hutton had any advantage because of Short, who was his partner in a government consultant business.

“He’s doing his thing, and I’m doing my thing,” Cunningham said, adding that the partnership dissolved a decade ago.

The winning firms in LANCER also proved to be generous campaign contributors over the last 2 1/2 years, in sharp contrast to the firms they bested.

For example, Smith Barney contributed $60,000 through its employees and political action committee to Mayor Bradley and $11,800 to council members.

E. F. Hutton and its employees contributed more than $29,000 to council members and the mayor.

Travers Bell Jr., the top executive of Daniels & Bell Inc., the company brought into the LANCER project as a racial minority participant, funneled more than $11,900 to the Bradley campaign, of which Bell is the national finance chairman. Daniels & Bell contributed another $7,000 to council members.

Grigsby Brandford, the other minority participant, donated $8,000 to council members and $5,800 to Bradley.

Losing Bidders Contributed

Losing bidders Salomon Bros. and Merrill Lynch, meanwhile, had each given about $10,000 to the Bradley campaigns since 1984; Salomon donated no money to council members in that period, and Merrill Lynch contributed $700. Another firm, Goldman Sachs, which was ranked third best of the bidders by the selection committee and passed over by council members, donated only $900 to council members and $5,100 to Bradley.

By winning the contract awarded last August, the successful underwriters stand to make $998,750 in sales commissions and $1 million in management fees as well as recoup $189,269 in expenses during the first phase of financing the LANCER project. In the second and final phase--which involves the sale of about $200 million in long-term replacement bonds to finance LANCER--the four firms could share in a projected $3.8 million in commissions.

Lindsay, his council allies and the financial houses that prevailed in marketing the initial LANCER bonds scoff at complaints about how the winners were selected. They point out that no one, including critics of the selection process, questions the services performed so far by the winning firms.

And Lindsay offered his own reasoning why one highly rated firm failed to get his vote.

During an interview, Lindsay said he opposed the Salomon Bros. bid because of the company’s South African connection. But he also told The Times how disturbed he was when one of that firm’s executives bluntly told Lindsay that he had been unaware of who Gilbert Lindsay was or why the banker should pay him a visit.

“So, he didn’t get the job,” Lindsay said. “You can say that I just wanted to slap his ass, if you want to say it. That’s good enough for me. I don’t care what you say.”

LANCER BONDS: WHO GAVE, WHO GAINED

Campaign finance statements show that investment banking firms and their employees that contributed the most to the campaigns of Los Angeles City Council members and to Mayor Tom Bradley were the firms that obtained the city’s bond business to finance the LANCER trash disposal project.

LANCER Project Political Contributions Bond Sales, Earnings Company 1984 to mid-1986 and Expenses Councilmen Mayor Bradley Sold Commissions Smith Barney $11,800 $60,000 $156 Million $659,175 E.F. Hutton $11,300 $18,350 $45 Million $189,763 Salomon Bros. $0 $10,000 $0 $0 Merrill Lynch $700 $10,250 $0 $0 Goldman Sachs $900 $5,100 $0 $0 Kidder Peabody $600 $16,000 $0 $0 Grigsby Brandford $8,000 $5,800 $28 Million $119,850 Daniels & Bell $7,000 $11,900 $6 Million $29,963 Pryor, Govan $3,000 $1,100 $0 $0

LANCER Project Bond Sales, Earnings Staff Company and Expenses Recommended. Expenses Fees Smith Barney $146,642 $300,000 No E.F. Hutton $16,850 $250,000 No Salomon Bros. $0 $0 Yes Merrill Lynch $0 $0 Yes Goldman Sachs $0 $0 No Kidder Peabody $0 $0 No Grigsby Brandford $8,330 $200,000 Yes Daniels & Bell $17,447 $250,000 No Pryor, Govan $0 $0 No