Thursday, August 12, 2004

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In the wake of a government corruption scandal, Philadelphia officials will be launching a search for the city's new swap adviser over the coming months.

Philadelphia has had an "ongoing relationship" with its current swap adviser, CDR Financial Products Inc. - a Beverly Hills, Calif.-based firm that has made significant contributions to local politicians - since the firm invested bond proceeds from a Philadelphia Gas Works deal in 2001, said outgoing finance director Janice Davis. The firm has also assisted the city with swap asset management and mark-to-market analysis.

The city is currently putting together its request for proposals, Davis said this week.

Some speculate that this move to hire a swap adviser through a competitive process stems from the fallout from alleged pay-to-play abuses in recent months. Following a federal probe that came to public attention in October, former city Treasurer Corey Kemp, well- known bond attorney Ronald A. White, and executives from J.P. Morgan Securities Inc., Commerce Bank in Pennsylvania, and Janney Montgomery Scott Inc. were among 12 individuals indicted in June and have since pleaded not guilty to all charges.

Despite working with CDR without using a competitive bid process, Davis defended the firm's selection. When CDR first began to work with Philadelphia, "they were the only guys around who were in that business," and now the city hopes to get a more comprehensive idea of other available services, she said.

"They are in a niche that not many people are in, and they provide an excellent product," said Davis, who leaves her position in Philadelphia today after about four years with the city. Davis has been chosen as Atlanta's next chief financial officer.

As the use of products such as swaps and swaptions has proliferated in the municipal bond arena, swap advisers are increasingly in demand, with issuers seeking guidance in navigating these often complex transactions.

Since 2000, CDR president David Rubin has donated $42,500 to prominent Pennsylvania Democrats, according to the Pennsylvania Campaign Finance Web. His beneficiaries include Philadelphia Mayor John Street, Gov. Ed Rendell, and Sen. Vincent Fumo, D-Philadelphia. Rendell was mayor of Philadelphia from 1992 to 2000.

Rubin could not be reached for comment this week. Through an associate at CDR, he deferred inquiries on the firm's business in Philadelphia to the city.

While the Municipal Securities Rulemaking Board does not regulate swaps, its Rule G-37 prohibits broker-dealer firms in the municipal market from engaging in negotiated muni securities business with an issuer for two years if they or their municipal finance professionals make political contributions to officials of the issuer who can influence the awarding of bond business. It does allow municipal finance professionals to donate up to $250 to any issuer officials for whom they can vote.

Donations are from advisers not uncommon, however. Another search showed that David Eckhart, chief executive officer of Investment Management Advisory Group Inc., a derivatives and investment provider in Pottstown, Pa., has made $61,750 in contributions to Keystone State political groups since 1999.

Various employees at Philadelphia-based Public Financial Management, a large financial adviser which also consults on swaps, have made more than $10,000 in political donations in Pennsylvania since 1998, the site shows. The company says no employees who advise on swaps have made such contributions.

In the indictment, authorities list two unidentified companies, an underwriting firm and a financial services firm, who were involved with White, the Philadelphia bond attorney who allegedly shuttled business to those he favored.

The financial services firm retained White in April 2001, according to the indictment. The indictment also states that this firm donated $5,000 to Street's campaign in December 2000, November 2002, and June 2003.

According to the campaign finance site, Rubin gave $5,000 in donations to Street in December 2000, November 2002, and June 2003.

A spokesman for the U.S. Attorney's Office for the Eastern District of Pennsylvania said this week that the investigation is ongoing.

Meanwhile, several swap advisers expressed keen interest in working with Philadelphia if they receive an RFP.

"We believe we are one of the most qualified swap advisory firms out there, and we would definitely respond," said Eckhart of IMAGE.

Jeff Pearsall, a managing director at PFM, said his firm "would welcome the opportunity to respond" if it receives an RFP.

Philadelphia has about $570 million in swaps outstanding and an $86.1 million swaption that can be exercised in May.

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