City Politicians Reap a Harvest in Bond Business

As the hundreds of guests sat down at a fund-raising lunch for the California Medical Center and its newly named Gilbert Lindsay Children’s Center, the gathering of corporate executives, sports figures and politicians warmly applauded the self-styled Emperor of the Great 9th District.

But when the 85-year-old Lindsay took his bows, the crusty, plain-spoken Los Angeles city councilman who has represented the downtown business district for more than 23 years singled out a special group from among the potential donors in the room.

“I want all of you investment bankers, friends of mine, (to) send me a check,” he said. “About 10 or 12 investment banking groups (are) here right now. I’m not going to call any names because I might get mixed up and miss one, and I’ll lose $5,000.”

Lindsay explained how he had been wined and dined in the previous two days by bankers in search of municipal contracts, “(coming) out here to talk business with me and my good buddy, (Councilman) Dave Cunningham, putting on the hustle to get some business.”

“We’ll accommodate you,” he assured them. “But this is one time, I’m asking you to do something for me. (Go) home and write me a check for 2,000 bucks . . . and make it out to California Medical Center. Send it to me so I’ll know you’re sending it. I want 2,000 (or) up, and I don’t care how much up.”

The investment bankers--some of whom who did not appreciate the sudden spotlight--responded with their checks if not their enthusiasm.

“You can’t afford to turn down a Gil Lindsay,” said one banker who asked not to be identified. “That’s the way things are done. If you want to stay in business, you have to do business.”

The performance last February was vintage Lindsay, a mixture of the gruffness and candor for which he is well known. But his pitch to financial experts who deal in municipal bonds tapped a potential pool that, while not new to the world of political money, is ever deepening and ever more profitable, particularly in Los Angeles where the rewards can total in the millions.

An investigation by The Times into the complex and largely obscure world of financial underwriting of bond transactions to finance public projects found that there is a growing link between city politics and the bond business, that the donors to politicians are often the financial companies that these same politicians favor with the city’s lucrative bond-servicing business.

‘Auctioneering Process’

Although the donations are within the law and are ostensibly solicited for unselfish causes--for example, helping the black community--some of the choicest contracts have landed with those who contribute the most, either in the form of checks written to the political campaign accounts of members of the Los Angeles City Council, or to their favorite charities.

The process is defended by those who get contributions, like Lindsay, who challenges anyone to make a case of wrongdoing against him; it is characterized variously as a necessary evil to a normal part of maintaining access to City Hall by the financial firms who contribute--and it is endured with embarrassment bordering on shame by critics, including other members of a sharply divided City Council.

“We no longer have a competitive bidding process,” complained Councilman Ernani Bernardi, the author of a city ordinance that sets contribution limits. “Instead, we have an auctioneering process.”

Councilwoman Joan Milke Flores, although she accepts campaign contributions from investment bankers, said that it alarms her that signs of a quid pro quo have developed, making it appear that campaign contributions and political friendships are necessary currency for doing business at City Hall.

“I think that it’s obscene when someone coming in for something suggests you have to do that (contribute to a council member’s campaign chest),” she said, referring to bidding by investment bankers for city bond business. “But I think it’s really, really immoral to have elected officials imply that. And I think that’s happened.”

Increasingly, financial underwriters have been involved in floating bonds to build such major projects as the Los Angeles Convention Center, new terminals at Los Angeles International Airport and expanding the capacity of the Port of Los Angeles. Bonds have been used for community redevelopment projects, to erect public housing and to help private businesses obtain tax-exempt financing for various public projects. In addition to the general-obligation bonds backed by the city and approved by the City Council, separate authorities such as the Harbor and Airport departments and the Department of Water & Power also issue bonds for improvements and new projects.

Financial companies, in turn, do a lucrative business in selling the bonds for the council and other public agencies, as do lawyers hired as legal counsel to oversee bond sale transactions.

Last year, investment banking firms and bond attorneys handled more than $3.5 billion in bond business for the City Council or city agencies. Included were the sale of $310 million in bonds to revamp the Los Angeles Convention Center and $235 million to build the new LANCER trash-to-energy plant in South-Central Los Angeles.

Coming up this year is the first issue of $700 million in bonds to help pay for expanding the capacity of the city’s Hyperion waste-water treatment plant and the sewer system feeding into it. The transactions will involve several underwriting bids spread over the next few years. In addition, revenue bond proposals are being considered for airport construction, housing and other projects that have the financial community eagerly eyeing Los Angeles.

It’s a “virtual gold mine out there” for bond sellers, said one New York banker.

Except for contracts that they award by competitive bidding, public bodies may parcel out their bond business as they please, overruling staff recommendations if they wish--as the Los Angeles City Council did on the LANCER project--and inviting intense lobbying efforts by competing investment banking houses. In Los Angeles, politics and the flow of political money have become a part of the process.

Price They Pay

“I don’t think as much attention as is necessary has been paid to qualifications, recommendations and experience as to closeness--either friendship or who gets in to see whom more often--and political considerations,” Councilwoman Flores said.

Financial underwriters and bond lawyers see campaign contributions as the price they must pay to remain in contention, she added.

“Not that they will necessarily get (the contract) if they contribute, but (the impression is that) we’ll throw everybody (who has contributed) in a bag, and those are the people we’ll pick from,” Flores said. “I think that’s sort of the impression they have.”

None of the donations to City Council members or the mayor have been made illegally, according to campaign reports, and some banks and law firms that have engaged in city business have given little or nothing in the way of campaign money.

But investment houses and their employees, according to a computerized review of campaign records, contributed more than $320,000 over the last 2 1/2 years to the political committees of council members and to Mayor Tom Bradley for both his mayoral and gubernatorial campaigns. And many of those financial underwriters and law firms also reaped millions of dollars in fees and commissions from the bond marketing business they were awarded by the city.

Last fall, in the bitter battle to underwrite the bonds for the LANCER project, the winners were those who were among the most generous donors to key council members and to Mayor Bradley’s campaigns.

Although the mayor does not vote on individual contracts, Bradley’s office can have a persuasive voice in lobbying council members. And the mayor’s appointees on various independent boards can help choose underwriters or bond attorneys.

For instance, after the Harbor Commission formed the Los Angeles Harbor Improvement Corp. in late 1984 to act as the Port of Los Angeles’ nonprofit financing arm, one of its commissioners--Dominick A. Rubalcava--recommended the selection of a prominent law firm as bond counsel.

The harbor improvement corporation panel, whose members are appointed by the Harbor Commission, went along with the selection of the firm--Finley, Kumble, Wagner, Heine, Underberg, Manley & Casey, which includes among its members a city water and power commissioner. And the panel chose the law firm of Johnnie L. Cochran Jr., who is also an airport commissioner and whose clients include Councilman Richard Alatorre, as assistant bond counsel. The presence of Cochran, a black, among the attorneys also satisfied a mayoral and council directive calling for increased minority participation in city contracts.

Some harbor tenants seeking low-interest financing for their projects, who were required to use Finley, Kumble as their bond counsel, complained that the law firm failed to help them meet a deadline to float tax-exempt bonds. Tenant Chet Lancaster of Mike’s Marine in San Pedro, who had planned to use the money to build a fuel dock and another structure, said the delay means that his company will pay $900,000 in added interest fees because he was forced to take out a commercial loan.

“You’re damn right it cost me,” Lancaster said. “It cost me a lot of time, a lot of money and a lot of frustration.”

Rubalcava, whose commission term ended in June, denied that Finley, Kumble was chosen for political reasons and defended the firm. However, faced with the tenant complaints, the harbor commission later waived the requirement to use Finley, Kumble and tenants were allowed to retain their own bond lawyers.

Barney Allison, head of the firm’s West Coast public finance division, said that Finley, Kumble’s work with tenants was adequate. “I think we did a bang-up job.”

Still, there is no denying the political clout of Finley, Kumble. Among its attorneys is Rick Caruso, a Department of Water and Power commissioner, who has lobbied City Hall in the past for the firm. Councilman David Cunningham’s son, David Cunningham III, is also an attorney with the firm and was at the center of questions that were raised earlier this year when the senior Cunningham pushed for Finley, Kumble to be added to attorneys working on the LANCER project.

Earlier, Cunningham had retained his son as a lawyer for his own political committee--for a $12,000 retainer. But the councilman denied any conflicts in voting for his son’s law firm.

Another Finley, Kumble’s bridges to City Hall is Robert E. Thomson, one of the firm’s managing partners, who was recently named Bradley’s gubernatorial campaign manager. Finley, Kumble lawyers gave $31,675 to the mayor and $16,500 to council members since the beginning of 1984. Cochran gave $5,100 over that same period.

These firms are not alone among bond lawyers who are both heavy contributors to city officials’ campaigns and recipients of city business.

O’Melveny & Myers, which has dominated the bond counsel business in the city for years and which still is among the leading local law firms, gave more than $41,000 to the mayor and council members over the last 2 1/2 years.

The council member who received the most from all bond company contributors in that period was the redoubtable Gilbert Lindsay, the up-from-the-bootstraps, former janitor who wields his power conspicuously as chairman of the council’s Public Works Committee and is the second most senior member of the City Council.

“All things being equal, and I’ve had a hundred million dollars of the city’s money, the state’s money, everybody’s money to dispose of. All things being equal, without juggling or anything else, I’m going to take care of my friends first,” he told The Times. “Write it in the headlines.”

Contributions to Lindsay have gone to his political campaign fund, to the center for abused children that bears his name and to the nonprofit Theresa Lindsay Foundation that he formed and named after his late wife.

The money going directly to the Lindsay campaign account totaled $301,260 last year. Despite a new city law that limits the size of individual donations in City Council races to $500, Lindsay--like other council members--skirted that ordinance by establishing a fund for campaigning for statewide or county office, on which no campaign fund limits are set.

None of that money can be used for a city election. And although there are no indications that the elderly, entrenched Lindsay is seeking another political office, he can still legally use the money to help other candidates or to donate to such causes as the Theresa Lindsay Foundation.

That foundation, formed ostensibly to provide scholarships and to assist nonprofit community groups, has raised about $30,000--most of it from investment banking firms who do business or are seeking business with the city. None of the money has ever left the account.

While lauding the goals of the Lindsay charities, some underwriters expressed discomfort at what they perceived to be pressure to respond and not risk alienating a powerful politician.

When asked if he exerts any pressure, Lindsay scoffed at the notion.

“I haven’t put the Theresa Lindsay Foundation as a hammer over anybody’s head,” he said.

‘Moral Responsibility’

His chief aide, Robert Gay, agreed, saying that if contributors “ . . . thought it was a shakedown, then they have a moral responsibility not to contribute.” He said that there should be a clear delineation between requests for charitable contributions and for political campaigns.

As his deputy spoke, Lindsay interjected: “I’ll beat the hell out of them if they don’t give to charity.”

Later, the councilman reiterated that he has not squeezed anyone for contributions, and he disputed investment bankers who have privately complained otherwise.

“If they don’t like the way we operate, stop giving money to (Gov. George) Deukmejian, stop giving money to Bradley, stop giving money to all the supervisors and councilmen. And they (can) just close up house,” he said.

“They don’t have to come here. We don’t need them any more than they need us. If they’re going to make money, they got to do business with us. If we want to finance our project, we’ve got to do business with them.”

Other council members also resented any suggestion of strong-arm tactics.

“I have never made anyone feel like that in my life on the City Council,” said Cunningham, who collected $29,200 from bond business sources since 1984, third behind Lindsay and Councilman John Ferraro, who ran for mayor in 1985. “I have helped people who never contributed to my campaign. . . . I have never intimated to anyone (to contribute) or put pressure on anybody.”

Councilman Robert Farrell, who received $19,500 in contributions and pledges from investment bankers during an April dinner, said the amount that council members receive is nothing compared to the profit that underwriters make from the city. And he bristled at those bankers who feel that such donations are tainted.

“I’d like to argue that these guys are blowing smoke trying to come off that they’re so pure and they’re so pristine and they’re so professional in their business activities. They’re sharks. They are stone capitalists. They will do anything to get a deal. That is the fundamental thing,” he said.

With cutbacks in federal aid and the resistance of taxpayers to footing the bills for expensive projects--reflected in such initiatives as California’s Proposition 13 eight years ago--municipalities such as Los Angeles have relied increasingly on bond sales to help raise needed cash.

Process Is Simple

The process is relatively simple: Bonds are sold to investors attracted by their tax-exempt earnings. The city uses the money for its stated purpose, to expand a sewer system, for example. To carry out the transaction, the city can hire a financial adviser who outlines the requirements needed to sell bonds, after which an underwriter finances the project and recoups the investment from bond sales; or it can have the underwriter or a syndicate of financial houses handle both jobs--for a management fee and commission.

Bond lawyers, in turn, are hired to handle the legal requirements, which can differ in complexity from deal to deal.

As the municipal bond business grew over the years, more firms have vied for the jobs and the competition has become fierce, and could become more fierce. If Congress removes some of the tax-exempt provisions as part of the tax legislation now being considered, the municipal bond market could shrink, leaving fewer jobs to bid for.

In Los Angeles, where municipal bonds have the highest ratings--meaning the lowest-rated risk for investors--the competition is particularly keen. And some underwriters fear that a major deal can be won or lost on political relationships and campaign contributions.

Although he said it is important to note that he has never been forced to give a campaign contribution, Anthony J. Taddey, local managing director for public finance in Los Angeles for Merrill Lynch Capital Markets, conceded that donations are part of building good relationships with an officeholder--a factor that can prove as important in winning a job as providing good services or offering reasonable fees.

“Everyone who I have dealt with is a straight shooter,” Taddey said. “But as long as you compete and are in the top finishers, say the top three or four or five firms (contending for a municipal bond contract), are relationships going to win the day? Yes, I think so.”

The Ohio-based Cranston Securities Inc. is a prominent campaign contributor and is also active in city bond issues. However, Louis Moret, a local executive for the firm and a former public works commissioner, said Cranston did not win any of its municipal bond business because of those campaign donations or as a result of his personal friendship with council members. City officials, he said, have tried to spread the municipal bond business among a number of firms.

Smith Barney, Harris Upham & Co.--winner of bonding business on the LANCER project--is among the largest donors to council members and to the mayor. But Morgan J. Murray, the firm’s executive vice president for public finance, said those contributions are merely to keep pace with other firms.

“I’m not going to say that political contributions made by investment bankers around aren’t designed to put them in the best light when they’re going for business,” Murray said. “All I’m saying is that from Smith Barney’s standpoint, it’s not our cutting edge, and because of the competitive element, we’ve got to participate. We don’t rely on that to get business.”

Highest Contribution

When Councilman Farrell held his April dinner, Smith Barney’s $5,000 topped the amount given by investment banking firms.

As the new chairman of the Energy and Natural Resources Committee, Farrell is considering sponsoring a proposed city Charter amendment that would relax the requirement that most underwriting contracts be awarded on the basis of competitive bidding. Instead, the Charter change would allow more contract awards through a negotiated process.

Contract awards by competitive bid are determined by the lowest price submitted by underwriters. Negotiated underwriting allows for criteria other than cost to be used in choosing a firm; the underwriter’s fee is then negotiated after the choice is made.

Critics of the competitive process say that some deals are too complicated for competitive bids and restrict cities to selling bonds for a fixed amount on a given day--at a possible financial loss to the city. Opponents of negotiated contracts, meanwhile, claim that that procedure opens the door to politicking and checkbook lobbying of public officials.

Currently, the City Charter calls for competitive bids unless there are sound financial reasons for making a negotiated bond contract, which, besides setting up the conditions for intense lobbying of public bodies, also means larger commissions and fees for the winning firms. According to the city attorney, the Los Angeles City Charter bars the Department of Water and Power, the Harbor Department and the Airport Department from entering into negotiated contracts with bond sellers--a requirement that Farrell says he wants eliminated.

Such a change is supported widely in the investment banking community, but Farrell brushed aside the suggestion that the financial firms are counting on him to push through the proposal.

“I am an errand boy and guy who will carry motions to facilitate certain kinds of activities?” he asked rhetorically. “The least thing I am is a fellow to do that for the financial industry. I do that for issues and causes and things like that. . . . That is not of my cut to carry things for financial guys.”

However, Farrell--along with the other black members of the City Council, Cunningham and Lindsay--said he has no qualms about steering some city business to minority-interest firms to help accomplish a major goal: getting more blacks and other minorities into public finance and into business with the city.

Accomplishes Aim

Said Cunningham: “If I have in any way caused underwriters to be uncomfortable, to itch or to hem and to haw or to sweat or pull their neckties hard because of my concern about females and minorities . . . then I think I have accomplished what I came here to do.”

Lindsay said his efforts were aimed at helping poor residents in his community and added that complaints from losers in the race for city business began only after minorities became more involved and an effort was made “to give minorities some chance to make some money.”

In the LANCER deal, Lindsay had championed the cause of Daniels & Bell Inc., the first black firm on the New York Stock Exchange. And its president, Travers Bell Jr., responded with $3,000 in campaign contributions to Lindsay, plus donations to his charities.

Bell, sitting in his Wall Street office, said he makes no apologies for giving money to a council member whom he called “a hero” for overcoming obstacles in his political career and for helping minority-owned firms.

“Where there have been black public officials, they have allowed us the opportunity to compete. . . . They opened the doors,” said Bell, who also cited Mayor Bradley and the other black council members for their help.

“I think every firm in this industry owes Gil Lindsay a contribution, period,” Bell said. “And I don’t care if they don’t do business out there, they owe him. They’ve been doing business out there for a hundred years, and they haven’t given him anything. . . . I don’t see anything wrong with that.”

CAMPAIGN CONTRIBUTIONS TO COUNCIL MEMBERS

From a few hundred dollars to several thousand, money flowing from investment bankers and law firms that compete for the city’s municipal bond business has reached the campaign funds of each member of the Los Angeles City Council, campaign finance statements from 1984 through mid-1986 show.

Contributions Contributions Council From Investment From Bond Members Bankers Lawyers Total 1. Gilbert Lindsay $28,300 $8,300 $36,600 2. John Ferraro 11,900 19,550 31,450 3. David Cunningham 16,000 13,200 29,200 4. Michael Woo 9,950 9,660 19,610 5. Robert Farrell 15,000 3,000 18,000 6. Richard Alatorre 9,460 5,400 14,860 7. Joan Milke Flores 3,450 7,500 10,950 8. Pat Russell 3,200 5,300 8,500 9. Hal Bernson 3,000 775 3,775 10. Howard Finn 400 2,800 3,200 11. Joel Wachs 1,100 1,500 2,600 12. Joy Picus 800 1,400 2,200 13. Zev Yaroslavsky 200 1,600 1,800 14. Ernani Bernardi 125 1,400 1,525 15. Marvin Braude 200 none 200