By Joel Thurtell
Californians:
Greetings from Michigan.
In the early 1990s, a Michigan school district actually sued its attorneys in a CAB deal.
Amazing!
As you West Coasters read the following article, you might want to ask yourselves whether some of the same selfish, cartel-like behavior is not now taking place when your schools issue high-interest Capital Appreciation Bonds.
The school district in Pontiac, Michigan won a multi-million dollar judgment against its bond counsel, the prestigious firm of Miller, Canfield, Paddock & Stone.
Eventually, the case was settled. Miller, Canfield paid Pontiac schools $15 million.
I call it amazing, because it was unheard of for a school board to attack its law firm — especially an elite firm like Miller, Canfield.
For anyone interested in how bond deals are cut, the case was an eye-opener — a one-time-only opportunity to observe how bonds are made.
We learned, for instance, that two bond underwriters and two law firms shared nearly all of the school bond deals in Michigan.
We learned that in 52 deals — the majority in the state — the bond attorney represented both the school district and the bond underwriter.
We also learned that bond attorneys had a financial motive for skewing deals to favor underwriters.
And we learned that none of the players thought this was a blatant conflict of interest.
It all came out in sworn testimony.
With the underwriters, lawyers and supposedly independent financial advisers, it was all about their profits.
Screw the taxpayer.
We know of $20 billion in Capital Appreciation Bonds issued in California since 2000. Interest on those bonds is unknown, but may be $70 billion.
Here, reprinted with permission of the Detroit Free Press, is my April 5, 1993 article about the Pontiac lawsuit against Miller, Canfield.
If you are an honest school official, county treasurer, district attorney, attorney general or governor in California, you might consider these Michigan newspaper stories as a kind of road map suggesting where you may find signs of collusion in your state.
Headline: PONTIAC SCHOOLS SUE LAW FIRM OVER ISSUE
Sub-Head:
Byline: JOEL THURTELL FREE PRESS STAFF WRITER
Pub-Date: 4/5/1993
Memo: ; BUYING NOW, BUT PAYING LATER
Correction:
Text: In the very competitive, but very staid, world of bond sales, the Pontiac
School District has done the unthinkable — dragged its own law firm into
court, charging legal malpractice in a $54-million bond deal.
In a lawsuit, the district accuses Detroit’s prestigious Miller, Canfield,
Paddock and Stone of botching the language of a Feb. 5, 1991, ballot proposal
in which voters authorized the bond sale.
Dennis Pollard, the district’s attorney, said in the lawsuit that the
proposal failed to mention that part of the bond sale proceeds were needed for
a new school bus garage; as a result, the money can’t be used for a garage
and the present one is sinking into a swamp.
Miller, Canfield claims that school officials never told George Stevenson,
the lawyer handling the bonds, about plans for the new garage.
Pontiac claims, too, that Stevenson did not disclose that the law firm
was working for the bond underwriter, Kemper Securities, and the Michigan
Municipal Bond Authority, which had a hand in marketing the bonds.
Richard Barch, a financial adviser active in Michigan bond sales, said it
is not unusual for one law firm to handle different ends of a deal,
representing both the government agency selling the bonds and the
underwriting firm, which buys them wholesale and sells them retail.
“I don’t think it’s that much of a conflict, although it may have the
appearance of it,” Barch said. “It’s sort of a friendly marriage. It’s not
like a divorce.”
The dominant law firm for school bond sales in Michigan, Thrun, Maatsch
and Nordberg of Lansing, has worked for school districts and underwriters at
the same time on 41 CAB deals. Miller, Canfield has done 11 dual CAB
representations. All of the Miller, Canfield deals and all but seven of the
Thrun deals involved Richard Allen’s firms as underwriter.
In a deposition for the Pontiac suit, Miller, Canfield attorney Stevenson
said the bond purchase agreement, “of any of the aspects of underwriter’s
counsel work, would be the one where there is a potential for conflict.”
“The underwriter wants to make a deal, and in their pricing they’re going
to want to do it so they can sell the bonds as efficiently as possible,”
Stevenson said. “That may or may not be in the best interests of the issuer.”
Caption:
Illustration:
Edition: METRO FINAL
Section: NWS
Page: 9A
Keywords: ; SCHOOL; PONTIAC; FINANCE
