Flap develops over who will sell convention center bonds: BofA backs out of historic deal, cites lobby influence.

Los Angeles officials may decide this week whether to overrule city staff advice and allow an African-American-owned firm to underwrite the largest municipal bond refinancing in the nation's history, officials said.

The heated controversy over which investment bankers will underwrite a $500 million refunding of L.A. convention center bonds has prompted one firm, San Francisco-based Bank of America, to drop out of the deal, charging that lobbyists poisoned the selection process.

The dispute stems from a May 12 meeting at which L.A. Convention and Exhibition Center Authority commissioners voted to disregard city staff recommendations that New York-based brokerage Goldman Sachs & Co. serve as senior manager for the refunding issue.

Instead, convention authority commissioners voted 10-1 that African-American-owned Grigsby Brandford & Co. be awarded the senior manager slot.

"I felt very strongly that they (Grigsby) met the criteria and they have a lot of experience," said Steven Silberman, a convention commissioner. "Wouldn't it be wonderful to make history with a firm that is not only qualified but is minority-owned? Especially given what we've been through with the unrest and the attempts to heal this city."

Because this is such a large bond refinancing, three tiers of investment banking firms work on the deal. One firm is the lead senior manager, the so-called "book runner," two firms are in the second tier as co-senior managers and a group of firms are in the "selling group" or third tier.

Firms in the top bookrunning slot incur more risk and direct the overall sale of the bonds, while selling a choice part of the issue themselves. They are also paid more in fees by the governmental agency issuing the bonds.

The estimated $500 million refunding of convention center bonds -- pooling already-sold bonds paying higher interest rates and reselling them to obtain today's lower interest rates -- is designed to save the city money. If completed, the issue will be the largest such refunding in the nation's history, according to Securities Data Co.

City staff had recommended Goldman Sachs for the top spot and San Francisco-based Grigsby for the second tier group, the co-senior manager slot, along with Bank of America. Instead, convention commissioners voted to drop Bank of America into the selling group position, picked Grigsby for the lead position, and moved PaineWebber Inc. up into the co-senior manager spot along with Goldman.

At least 28 investment banking firms submitted proposals to underwrite the issue, with at least 17 vying for the senior manager position.

Proposals were reviewed by city staff, the city's financial advisers and the city attorney's office, and their recommendations were made to the authority. Typically, the authority board adopts staff recommendations, sometimes with minor changes, and the proposal goes to the City Council for confirmation.

Charging that lobbyists worked to influence the May 12 vote and angered by the selection of Grigsby for the top slot, Bank of America elected to withdraw from the deal completely two days later.

"Among other considerations, it was and remains apparent the professional lobbyists representing other firms made substantial efforts on their behalf to influence this decision," wrote Anthony Taddey, director of the municipal securities group for Bank of America in a letter to City Administrative Officer Keith Comrie.

In his May 14 letter, Taddey said the bank had "grave concerns about the fairness and objectivity of the process" and added that the bank can only support a process which stands up to "close public scrutiny and serves the city's best financial interests."

Bank of America has underwritten, as senior manager, more Los Angeles City bonds than any other firm. In 1925, the bank underwrote a $500,000 bond issue for the city's library project.

Silberman, a commissioner, said that before the May 12 vote, he received "numerous calls" from people he thought were lobbyists, but that he did not return the calls.

In its letter, Bank of America asked the commissioners to sell the bond refunding by competitive bid, instead of by negotiated bid.

In municipal bond financings, a negotiated bond issue is sold by a team of underwriters picked by the governmental entity issuing bonds and the underwriting team selects when to sell the bond to get the best interest rate. In a competitive bid, the government agency decides to sell the bond issue on a certain day, and awards the bond issue to the team which can sell the bonds at the lowest interest rate that day, saving the agency money.

After the vote, the commissioners sent their findings to Mayor Tom Bradley, who asked administrative officer Comrie to prepare a report on the controversy. Comrie's report was sent to the mayor last Wednesday and could go before the City Council's finance committee on June 1 and then to the City Council, according to Gerry Miller, finance specialist for the city.

Miller said Comrie's report reiterated the city staff position that Goldman Sachs should be the lead underwriter.

"We don't have any basis for changing our recommendations," said Miller.

Out of the 15 convention center commissioners, 10 are appointed by the mayor and five are county appointees. Some bankers close to the issue have insinuated that the commissioners' vote to elect Grigsby was some type of favor to Mayor Bradley.

"It's absolutely not the case, they are shooting in the absolute dark," said Clinton Rosemond, a convention center commissioner. "I led the charge on this one and I haven't talked to Bradley. I've had no contact with him or his staff."

Rosemond said not only is Grigsby based in California, but it is a high-quality, minority-owned firm with experience.

"Obviously those traditional firms like Goldman and Merrill have been around for ages and can do the job. But what about Grigsby? Is it their time to move into the big leagues? We think the evidence is there for them," said Rosemond, who is also community relations officer for the Southern California Association of Governments.

"We think that it's time to break things up and do what Branch Rickey did in 1947 and bring new players on the field," he said. (Rickey, owner of the Brooklyn Dodgers, hired Jackie Robinson as the first African-American to play in major league baseball.)

In response to insinuations by some underwriters that Grigsby does not have the fiscal muscle to handle such a large bond issue, the company noted that it senior-managed a $170 million bond issue for Alameda County this year, a $45 million bond issue for L.A. County in 1992, senior-managed a $70 million financing for the Los Angeles County Transportation Commission in 1992 and senior-managed a $100 million issue for the San Francisco Public Utilities Commission last year.

The firm notes that the cities of New York, Denver and Atlanta have all tapped minority-owned or women-owned firms to senior-manage bond issues of $350 million or more.

Rosemond said it was especially important that California's cities, counties and other authorities give contracts for municipal bond business to California-based investment bankers, lawyers and financial advisers.

"We allow all these New York-based firms to come into our cities and our states and take our business. They laugh at us. We've got to grow our own home products," he said.

While spokespeople for both Goldman Sachs and Bank of America said they could not comment on the issue, Napoleon Brandford, director of capital markets at Grigsby, said, "What's the problem? It was done in a public forum. Everyone had the chance to make their proposal."

Brandford was adamant that no special favors were involved in Grigsby's selection by the commission.

"If you look at the (political) contributions we've made to Bradley, it's much less than any other firm in this deal," he said. "What it is, is that we're black and Tom is black, so people assume that there is something happening between us."

After the City Council votes on the issue, it will go back before the convention authority if the council votes against commission recommendations. Both the City Council and the commission must agree before the underwriting team can be selected.

And with delay, conditions in the bond market could change significantly, making it uneconomical to do the refunding.

"They need to be in agreement. If the two boards never come to agreement, potentially this issue may never be sold," said Miller.