CHICAGO - The switch earlier this year from a Republican to a Democratic administrationin Illinois - and the state's subsequent decision to sell a record $10 billion oftaxable general obligation pension bonds - led a handful of firms with a presence hereto add new consultants to their payrolls.
Some of those firms enjoyed close ties to the Democratic administration of Gov. RodBlagojevich, while the connections of others were more loosely woven and in some cases,a roadmap is required to follow the ties that link them through fundraising, sidebusinesses, and friendships.
Bear, Stearns & Co., the book-runner on the state's pension deal that sold this pastJune, earlier this year hired Springfield Consulting Group LLC, which is based in thestate capital and is owned by Robert Kjellander, a Republican heavyweight who is leadingPresident Bush's Midwest campaign effort. The use of Springfield Consulting was reportedby Bear Stearns in its first and second filings with the Municipal Securities RulemakingBoard in compliance with the G-37 and G-38 rules that require broker-dealers to reporttheir use of consultants and consultants' political contributions to issuers.
Shortly after the state in mid-April named the underwriting team for the pension deal, aBear Stearns spokeswoman told The Bond Buyer that the firm had not hired a consultant inIllinois to her knowledge and that if it was to employ one the fact would beappropriately reported. Firms have one month following the end of a quarter to reportthe use of consultants in their filings with the MSRB.
Kjellander asserted in a recent interview that Springfield Consulting's Republicanpedigree shows that Bear Stearns was selected for its skills, not its political pull,since the state Legislature and the executive office are now controlled by Democrats.
On the surface, the selection of Bear Stearns as book-runner doesn't appear to providemuch ammunition for critics of the freshman governor who believe that politicalinfluence holds sway in Illinois, but a look at underlying political and professionalconnections between Bear Stearns, Kjellander, and Blagojevich blur the lines typicallydrawn between party affiliations.
The use of consultants by firms seeking to boost their clout and obtain a spot onIllinois' largest deal ever occurred amid repeated statements from Blagojevich thatduring his term there would be "no more business as usual." That campaign statementhelped him capture the office formerly held by George Ryan, a Republican whose tenurewas plagued by ethics scandals.
The stakes were high, with underwriting fees totaling $35 million. Bear Stearns pocketed$8 million in fees on the $10 billion taxable GO deal. UBS Financial Services Inc. wasadded as a co-book-runner late in the planning but made only $5.5 million on the deal -an amount more in line with the level of compensation paid to the three other co-seniormanagers, according to figures provided by the state Office of Management and Budget.Co-managers on the deal received fees ranging from $250,000 to $1.2 million.
When Bear Stearns was named to the most lucrative spot on the deal, many local marketparticipants raised eyebrows. Skeptics may have been motivated by jealousy, but the factremained that Bear Stearns - despite being one of Wall Street's behemoths -wasn't rankedin the top 10 list of investment banks on high-grade corporate deals, the market wherethe state's taxable deal would price.
State officials defended the choice based on Bear Stearns' overall experience inmarketing Illinois debt and its reputation as a top municipal underwriter.
"The reason we chose them is because of their expertise and experience in dealing withthese types of bonds, the international market, and on Treasuries securities," saidBecky Carroll, a spokeswoman for John Filan, head of the state's Office of Managementand Budget. "John Filan chose that team based on his own review and the review andrecommendations of his staff and counsel. John wrote up that list and sent it to thegovernor's office, and they approved it verbatim."
State officials have also praised the firm's performance on the pension deal.
Bear Stearns' contract with Springfield Consulting calls for the broker-dealer to paythe consultant a "percentage of gross revenues earned by the client," according to thefiling. Bear Stearns did not make any payment to the firm in either the first or secondquarter, according to filings.
Springfield's Kjellander is a member of the National Republican Committee. He haslongtime ties to top Bush political adviser Karl Rove, which was viewed as a plus byBlagojevich's administration.
Kjellander also has ties to developer Antoin Rezko, a top Blagojevich fundraiser, whomKjellander reported on past state lobbyist filings due to work the two did together morethan a decade ago. "He's a friend, but we have no business relationship," Kjellandersaid in a recent interview. "He and I were involved in a project years ago."
Rezko's ties to the new governor are well documented. Rezko, an owner of Rezmar Corp.,raised more than $500,000 for the Blagojevich campaign, according to published reports.Earlier this year, Blagojevich picked Kelly King Dibble, vice president for businessdevelopment at Rezmar, to serve as executive director of the Illinois HousingDevelopment Authority.
Kjellander dismissed the notion that his ties to Rezko or Rove helped win him theconsulting contract with Bear Stearns. "That's ridiculous - that's patently ridiculous,"he said.
It is unclear whether Kjellander actually did any formal lobbying work for the pensionbond deal, since second-quarter MSRB filings did not report a specific monetary paymentto the firm by Bear Stearns. Bear Stearns spokeswoman Elizabeth Ventura said ifKjellander was paid in conjunction with the deal, it would be appropriately reported insubsequent quarterly filings. A rumor widely circulated around the local public financecommunity was that Kjellander boasted he had been paid $500,000. Kjellander deniedhaving received any payment.
Complementary Consultants
Market sources widely agree that local firms used consultants to complement their clout.Many of the firms with a strong presence in Illinois have some political connections,and in Bear Stearns' case, the firm turned to its former head of public finance inChicago, Peter Fox, to leverage his new-found connections to Blagojevich, according tosources.
On that front, again, the use of consultants came into play, although it did notnecessarily come under the purview of the MSRB's Rules G-37 and G-38. Fox is a formermanaging director at Bear Stearns, and during his tenure there in the early and mid-1990s he developed a close relationship with P. Nicholas Hurtgen, a top aide to then-Wisconsin Gov. Tommy Thompson.
Fox brought Hurtgen into Bear Stearns as a banker in 1995. Fox continued at the firm asa senior managing director until 1997, although he was more involved with the investmentside of the business during his last years there.
Throughout Fox and Hurtgen's tenures, while Thompson remained in office, Bear Stearnswas a favorite among underwriters for state and state-related agency debt. From 1990 to2000, Bear Stearns managed 10 Wisconsin negotiated bond sales totaling $1.5 billion,more than any other firm, according to Thomson Financial Securities Data.
Numerous sources said Fox, who is now the owner of Fox Development Corp., maintainsclose business ties with his former employer and with Hurtgen. According to sources, Foxand Hurtgen may have a business relationship in Knight Infrastructure, a Chicagoengineering company and a contributor to Blagojevich's campaign fund.
Fox Capital Fund, of which Peter Fox is a founding member, acquired a majority interestin Knight Infrastructure in 1999, according to a published report in the Champaign News-Gazette. Sources said Hurtgen has a vested interest in Knight Infrastructure, thoughHurtgen denied he has any connection with the firm through a Bear Stearns spokesman. Aspokesman for Knight Infrastructure said the firm is privately-held and does notdisclose ownership information. Fox also did not return phone calls to comment.
Fox has long been associated with Republicans. He was a fundraiser for former IllinoisGov. James R. Thompson and served in Thompson's administration. However, Fox has latelyestablished close ties to Blagojevich, as has Thompson, who played a key role onBlagojevich's transition team. Thompson is chairman of the prominent Chicago law firm ofWinston & Strawn.
According to a June story in the Champaign News-Gazette, Fox and Blagojevich appearedtogether at a groundbreaking ceremony for a $73.5 million project Fox Development wasworking on at the University of Illinois. The article mentioned that Fox was hosting afundraiser for the governor later that evening at his Champaign home.
The Illinois Leader, a conservative publication, last February published figures fromthe State Board of Elections that showed that Knight Infrastructure provided $30,000worth of free flights for Blagojevich during a period from just before his November 2000election through mid-December 2002. The firm has made subsequent contributions to thegovernor's campaign coffers since his inauguration in January. The governor's pressoffice did not respond to repeated inquiries seeking comment.
Early in the state's selection process for underwriters on the pension deal, it waswidely reported that some firms were advised by Blagojevich associates as to whichlobbyists to hire. Market sources have said the suggestions came from Chicago aldermanRichard Mell, a powerful local politician who is also Blagojevich's father-in-law, andChristopher Kelly, a businessman. Kelly contributed, through companies controlled by himor by his business associates, more than $400,000 to Blagojevich as the Democraticprimary drew to a close last year, according to published reports. Kelly is viewed asone of the governor's closest confidants.
Bear Stearns was initially advised to hire Chicago-based consultant Paul Rosenfeld. Whenthe firm was told instead to hire Springfield Consulting, Rosenfeld was awardedconsulting contracts with Fox Development and Knight Infrastructure. The IllinoisHousing Development Authority also recently hired Rosenfeld's firm Par Solutions as alobbyist.
Kelly did not return calls from The Bond Buyer seeking comment, but in an interview withCrain's Chicago Business published Monday, he denied allegations that he played a rolein matching firms and lobbyists.
In an interview Wednesday, Mell denied that he played any role in linking lobbyists withconsultants. "Absolutely not. I didn't make any calls. I have no desire to be involved"with those decisions, he said. Mell did call Rosenfeld one of his "best precinctcaptains."
Many political and market sources believe Rosenfeld's lobbying contracts with the IHDA,Fox Development, and Knight Infrastructure were a consolation prize.
Those behind-the-scenes ties have allowed the governor's repeated statements aboutcleaning up state government and his "no more business as usual" mantra to gounchallenged, some believe.
"This governor talks about reforming the process, but there is a consistent pattern ofnot just business as usual but worse than usual. I have never seen this state's bureauof the budget be used as such a tool for political purposes," said state Sen. StevenRauschenberger. "His administration has done things that would have made the Ryanadministration blush."
Rauschenberger is the spokesman on budget matters for the state Senate's Republicanminority leadership and is a candidate for U.S. Senate.
"It's about power relationships, and it's not as black and white as it seems," saidCindy Canary, director of the Illinois Campaign for Political Reform. "It underscoresthat these relationships aren't just about ideology but about power and who can opendoors for you."
Lobbyists aren't necessarily a bad thing, Canary said, but their use by companiesseeking the state's bond business underscores the need for strong lobbyist disclosurerules. Illinois' statutes have been criticized by government reform advocates, in partdue to a failure to impose penalties for not meeting the rules.
Hiring Habits
Second-quarter G-38 filings also show that some firms - both those that received a sloton the pension deal and those that did not - hired new Illinois-based consultants withmore apparent Democratic ties, while others stuck with longtime partners.
ABN Amro Financial Services Inc., a co-senior manager on the pension deal, ended itsrelationship with the powerful lobbying firm Ronan Potts as of June 1. Ronan Potts,which was also a lobbyist to the financial advisory firm FPT&W, where Filan was apartner before taking the state budget director's job, was previously paid $5,000 amonth.
Ronan Pott's co-owner is former lawmaker Al Ronan, who is the subject of a federalinvestigation into alleged corruption at the Metropolitan Pier & Exposition Authority.Ronan was a lobbyist for companies that sought contracts with the agency. The formerhead of that agency, Scott Fawell, was recently sentenced to jail time for corruptionduring his tenure as an aide to former Gov. Ryan.
ABN reported that it is using Nona R. Myers as a consultant in the firm's quest forstate work, at a rate of $6,000 per month plus some expenses.
Ronan was not out of a job for long. Merrill Lynch & Co., a co-manager on the pensiondeal, moved to hire his firm at $10,000 per month in the second quarter.
UBS, the other book-runner on the pension deal, employed two consultants - Springfield,Ill.-based Leone & Associates and former Chicago alderman Charles Bernardini, of the lawfirm Michael Best & Friedrich LLC. Bernardini was not used by the firm in the lastquarter of 2002, but he was hired again early this year, according to a UBS spokeswoman.The firm pays Leone $5,000 per month and Michael Best $6,000 a month plus additionalfees to be determined.
Michael Best contributed a total of $17,500 to Blagojevich and another $2,000 for hisinauguration celebration, according to the filings.
Citigroup Global Markets Inc., another co-senior manager on the pension deal, continuedits longstanding contract with the law firm Daley & George. It pays the firm $180,000 ayear. Chicago Mayor Richard Daley's brother Michael Daley is a partner.
Loop Capital Markets Inc., a co-manager on the deal, earlier this year hired RolandBurris' firm Burris & Lebed Consulting with a compensation package of $5,000 per month.Burris, a former state attorney general, lost to Blagojevich in the Democraticgubernatorial primary last year.
Among other pension deal co-managers Siebert Brandford Shank & Co. hired VincentWilliams at $4,000 per month and had paid the firm $8,000 as of the second-quarterfiling.
SBK-Brooks Investment Corp., hired Robert Vaughn Marketing at $2,000 per month duringthe second quarter for a total of $6,000 and Orlando Jones Consulting, which it paid$5,000 in June. Jones is a former aid to Cook County President John Stroger.
Melvin Securities LLC, a co-manager on the deal, pays Thomas P. Beck & Associates 10% ofnet profits on deals it helps secure, but during the second quarter it did not make apayment. The firm gave $1,350 to several Democratic candidates.
Mesirow Financial Inc., a financial adviser on the pension deal, continues to employconsultant William Filan of William Filan Ltd. at a compensation rate of $9,000quarterly. The firm has long used Filan, a cousin of the state budget director.
Other firms that were not involved in the pension deal but remain interested in securingstate-related bond business also made notable hirings. Lehman Brothers hired John Wyma &Associates, owned by John Wyma, who was Blagojevich's chief of staff when the governorwas a congressman and was a top aide on his gubernatorial campaign. Wyma is paid amonthly retainer fee plus a discretionary fee equal to percentage of net investmentbanking fees on certain deals, plus expenses. He earned $45,000 in the first quarter andanother $45,000 in the second quarter, according to the filings with the MSRB.
Lehman was one of the first firms to disclose its hiring of a politically connectedlobbyist as it vied for the pension deal. The firm's early reporting contributed to itsouster from the deal team after the information was reported in a local gossip column.
Morgan Stanley hired Doug Scofield, who was Blagojevich's deputy governor until March,when he resigned to spend more time with his family. Scofield is paid $5,000 per monthplus expenses.
William Blair & Co. paid consultant Michael Broderick $3,000. It also hired DallasIngemunson but has made no payment in connection with seeking state business, accordingto the filings. It also hired Orlando Jones and paid the firm $5,000 during the secondquarter.
Stern Brothers & Co. uses consultant Stephen Morrill of Morrill & Associates and paysthe firm $6,200 a month to lobby at the state capital on its behalf.
First Albany Corp. employs Luking & Associates at $1,500 per month to lobby for citybusiness and also pays Morrill's firm $2,500 per month.
Banc of America Securities reported using Democratic political heavyweight Clark Burrusas a consultant, paying him a percentage of deals secured, with no payment made in thesecond quarter. Burrus is the former head of capital markets at First Chicago NBD Corp.which was acquired by Bank One. He also is a former city comptroller with ties to MayorDaley and Cook County's Stroger.
Raymond James & Associates reported using Springfield-based consultant John Ross, with acompensation arrangement involving a $1,000 retainer.
Most of the banks using consultants maintain a Chicago office, a fact that runs counterto the claims of many dealer officials across the country. In recent interviews with TheBond Buyer for stories on municipal consultants, firms questioned on their use ofconsultants said that they are retained to keep the firms apprised of local developmentsin regions where the firms don't have a local presence.
Though most of the consultants reviewed for this story have not reported makingsignificant contributions to issuer officials, the links many have to elected issuerofficials are perceived as a way to reward close allies of issuers in an attempt toboost a dealer's position, market participants said.
