Insiders Are Cashing In on State’s Bond Market

With California state and local governments issuing bonds at a rapid pace, a handful of political insiders are quietly profiting by helping investment banks win the underwriting contracts.

An impressive list of politicos -- Democrats and Republicans alike -- have cashed in on the little-known but lucrative business. They include former San Francisco mayors Art Agnos and Willie Brown, a business associate of state Senate leader-elect Don Perata (D-Oakland) and Anaheim Mayor Curt Pringle.

Their role is to open doors for those banks. In return, they typically get 10% to 20% of the business they help land.

The growing use of consultants -- and a rash of high-profile criminal cases involving them -- is troubling regulators in Washington, and causing critics here to ask whether state and local government bond deals are going to the most qualified and competitive investment banks -- or the best-connected.

“These consultants very often add very little value and just represent a vehicle that politicizes the process,” said Arthur Levitt, chairman of the U.S. Securities and Exchange Commission from 1993 to 2001. “The name of the game is access. And campaign finance is what is driving the proliferation of advisors and gatekeepers.

“It’s ‘deal with us and you have a better chance of getting business.’ As far as I am concerned, that is money taken out of the pockets of investors.”

Banks that use consultants say it is the only way to keep track of potential business opportunities. “We don’t hire them for political influence,” said Dennis Ciocca, senior manager of Sutter Securities Inc. in San Francisco. “We don’t have enough staff to be on top of what is going on at the state level. If they can get us a piece of business we wouldn’t otherwise be aware of, then it is worth it.”

The Bond Market Assn., an industry group, argues that the consultants enable more firms to compete for bond deals, ultimately benefiting taxpayers. But critics question the hiring of political insiders for that job.

“It would be one thing if they were experts in this area,” said Robert Stern of the nonpartisan Center for Government Studies in Los Angeles. “But I don’t think these people are bond experts.”

It’s a secretive business. Many consultants did not respond to repeated requests for comment. And most investment bank executives contacted refused to discuss why they hired former politicians.

Some bank officials said privately that they would like to see federal regulators ban the practice outright so the banks wouldn’t feel pressure to hire people for their connections.

Federal records show that one of the top-earning California consultants is former Assembly Majority Leader Mike Roos, a Democrat who represented the Los Angeles area from 1977 to 1991.

Roos has long-standing ties to state Treasurer Phil Angelides, who picks the investment houses to bring into state bond deals. Roos gave Angelides one of his first big political jobs, as a chief of staff. He went on to help Angelides raise campaign cash.

Now, Roos runs a consulting firm in Los Angeles. His clients include San Francisco-based Stone & Youngberg, one of the leading sellers of municipal debt in California.

Over the 12 months ending in June, Roos helped the San Francisco firm land enough in state bond business awarded by Angelides’ office to collect a total of $214,000 in fees.

Angelides refused to discuss his relationship with Roos or any other consultant.

“If you want to know what the investment banks are getting for their money, the best people to ask is the investment banks,” said Mitchel Benson, a spokesman for the treasurer. “They are the ones who are hiring these people. They should explain why they are hiring them, who they are hiring and what they get out of it.”

Benson said the treasurer has stringent policies to ensure that every bank is treated equally, regardless of whom they hire. He said the treasurer will meet with any bank representative who asks. Roos declined to be interviewed, as did Stone & Youngberg representatives.

Stone & Youngberg recently added Brown, the former San Francisco mayor and Assembly speaker, to its roster of consultants. He was signed up under the same terms as Roos: $6,250 per month plus 10% of the business he brings in.

The use of such politically connected consultants has caught the eye of federal regulators.

The Municipal Securities Rulemaking Board, which oversees banks involved in government bond deals, is considering a ban on outside consultants after a spate of scandals across the country.

Most banks that have filed comments with the board -- including Stone & Youngberg -- oppose the proposal.

Agnos, the former mayor of San Francisco and a consultant for the Los Angeles investment firm E.J. De La Rosa, said the consultant’s role is not to provide access, but merely advice.

“I do no lobbying, I do not call anybody’s office,” said Agnos, who earned more than $220,000 off a single state bond deal in 2003. “I help the firm develop marketing proposals.”

He said De La Rosa asked him for advice in getting some of the state business that was dominated by major Wall Street firms, some of which directly employ former state officials.

“I said, ‘I know nothing about bonds. What I can teach you is how a politician thinks. I understood what worked and what didn’t work in the mind’s eye of a legislator.’ ”

Ciocca, of Sutter Securities, said any problems with consultants could be fixed with better rule enforcement. “Don’t just say every consultant is a crook and you can’t have them anymore,” he said.

Regulators say that enforcement has been aggressive, but that consultants are becoming increasingly brazen.

In June, the U.S. attorney in Philadelphia filed a criminal indictment alleging an elaborate scheme in which the city treasurer directed bond business to firms in return for kickbacks arranged by an outside contractor.

Illinois recently passed a law prohibiting the state from doing business with underwriters who give consultants a percentage of business they help land. The change was made after public outcry over an $809,133 fee paid by Bear, Stearns & Co. on a single bond deal to a consultant who is also on the Republican National Committee.

And in Los Angeles County, Tyrone Smith, a member of the West Basin Municipal Water District, pleaded guilty in December to extorting $25,000 from the investment firm M.R. Beal & Co.

According to the indictment, the payment was arranged through the bank’s consultant, former Inglewood City Councilman Garland Hardeman. The U.S. attorney’s office charged that half the $50,000 consulting fee that the Beal firm paid Hardeman in 2001 was then transferred to Smith in five cash payments.

Hardeman was not charged. Federal investigators say he is cooperating with them after pleading guilty to helping arrange bribes in a separate scheme, involving a waste-hauling contract in Carson. An attorney for Hardeman declined to comment and Hardeman could not be reached.

Hardeman isn’t the only politically connected consultant that the Beal firm hired in California.

The investment bank also hired Timothy Staples, a college roommate of Perata, who is considered one of the most influential Democrats in California.

At the time the bank hired Staples, he also was paying the senator tens of thousands of dollars for business advice -- it added up to more than $100,000 one year. As the senator collected those paychecks, he was pushing for legislation related to the bond deals that Staples was trying to land for the Beal firm.

The bank terminated its contract with Staples after the San Francisco Chronicle revealed his business relationship with the senator. By then, Staples had helped the investment bank land a spot in the underwriting pool for bond deals at the Port of Oakland and the Bay Area Rapid Transit District. And he got paid more than $129,000 for his work over two years.

The Beal firm was among those that have weighed in against a federal ban. Other banks, however, say it is time for the industry to get rid of the practice.

The investment firm J.P. Morgan now supports a ban after finding itself in the middle of the Philadelphia scandal, as well as an Orange County controversy involving its use of Pringle, the mayor of Anaheim, as a consultant.

The investment house paid the Republican mayor and former Assembly speaker $124,742 for consulting work over a 20-month period that ended in June 2003. Before the relationship ended, Pringle was pushing to finance a merger of toll road authorities in Orange County in a way that could have netted his client millions in fees.

Pringle said that by the time he became mayor, the work he was doing for J.P. Morgan was related to state issues only.

“Under no circumstances if the merger went through and they had gotten all the [tollway] business would I have gotten any compensation,” he said.

After the contract was terminated, Pringle tried unsuccessfully to remove Anaheim’s representative -- who was opposed to the merger deal -- from the Transportation Corridor Agencies Board.

“It was inappropriate,” said Orange County Treasurer-Tax Collector John Moorlach. “J.P. Morgan was a co-underwriter on the deal. Curt Pringle earned checks from them. How can he detach himself and be objective?”

Not all the political operatives cashing in on the bond business are local. Some banks go across the country for help navigating Sacramento.

UBS Financial Services, one of the world’s largest investment houses, secured billions of dollars’ worth of state bonds earlier this year with the help of Washington, D.C.-based National Strategies Inc. Members of the consulting firm have worked on or run political campaigns in California and other states, as well as worked at high levels of the federal government.

It gets paid $460,000 a year helping UBS secure bonds in California and four other states -- plus up to a $1-million bonus when UBS gets the lead position on California bond deals.

Asked to comment on what exactly National Strategies does for UBS, the investment bank limited its response to a one-line e-mail: “UBS’ use of consultants in the state of California is consistent with all applicable rules and regulations.”

That’s not a good enough answer for at least one candidate for state treasurer in 2006. Assemblyman Keith Richman (R-Northridge) said the state should stop working with the banks that hire consultants.

“These consultants are getting fees simply for peddling influence,” he said. “It’s a system ripe for the potential of corruption.”

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Bond consultants and their earnings

Following is a list of politically connected consultants hired by investment banks to help them get municipal bond business in California:

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Name: Art Agnos

Consultant: Former San Francisco mayor; former assemblyman (D-San Francisco)

Investment firm: E.J. De La Rosa, Los Angeles

Fee: 15% of state business, 10% of city business

Date: January 2001 -- present

Amount earned: $431,416

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Name: Willie Brown

Consultant: Former San Francisco mayor; former Assembly speaker (D-San Francisco)

Investment firm: Stone & Youngberg, San Francisco

Fee: $6,250 per month plus 10% of business

Date: February 2004 -- present

Amount earned: $31,250

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Name: Fernando Guerra

Consultant: Political science professor and lobbyist; former member of L.A. city commissions

Investment firm: E.J. De La Rosa, Los Angeles

Fee: $2,500 per month plus 10% to 15% of business

Date: January 1996 -- present

Amount earned: $968,637 (reflects the amount his firm has earned since January 2000

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Name: Garland Hardeman

Consultant: Former Democratic Inglewood city councilman

Investment firm: M.R. Beal & Co., New York

Fee: 15% of business

Date: April 2000 -- September 2003

Amount earned: $90,600

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Name: John Lewis

Consultant: Former state senator (R-Orange)

Investment firm: Kinsell, Newcomb and DeDios, Solana Beach

Fee: $1,600 per day/ four days per month

Date: February 2001 -- present

Amount earned: $69,360

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Name: National Strategies Inc.

Consultant: Washington, D.C., firm includes staffers with California political experience

Investment firm: UBS Financial Services, New York

Fee: $460,000 per year for work in five states plus possible Calif. Bonus

Date: July 2003 -- present

Amount earned: $465,000

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Name: Curt Pringle

Consultant: Mayor of Anaheim; former Assembly speaker (R-Anaheim)

Investment firm: J.P. Morgan, New York

Fee: Ranged from $2,000 to $18,500 per month, plus bonuses

Date: October 2001 -- June 2003

Amount earned: $124,742

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Name: Mike Roos

Consultant: Former Assembly majority leader (D-Los Angeles)

Investment firm: Stone & Youngberg, San Francisco

Fee: $6,250 per month plus 10% of business

Date: March 2003 -- present

Amount earned: $243,231

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Name: Timothy Staples

Consultant: Former business associate of state Sen. Don Perata (D-Oakland)

Investment firm: M.R. Beal & Co., New York

Fee: $5,000 per month plus unspecified percentage of business

Date: January 2002 -- March 2004

Amount earned: $129,000

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Source: Municipal Securities Rulemaking Board. Graphics reporting by Evan Halper