Tuesday, August 17, 2004

By Yvette Shields

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CHICAGO - A handful of investment banks will have to revise their contracts with consultants that lobby for business from the state of Illinois in order to comply with a new law that bans firms from paying consultants a contingency fee based on the business they help secure.

Firms that don't comply face a two-year lockout on participating in any of the multi- billion dollar issuance that comes from the state and its agencies annually. The law, part of a debt reform package included in the new, $43 billion fiscal 2005 operating budget, took effect when Gov. Rod Blagojevich signed the budget late last month.

The state will formally notify firms of the ban prior to the start of work on a bond transaction and will require firms to sign a "representation certificate" as part of the bond sale order saying that they are in compliance with the law, according to the state's debt manager David Abel.

The change doesn't impact the compensation arrangement paid to consultants who lobby for work with local governments in the state, even if the work of one consultant overlaps both the local government and state sectors. "This should not affect the arrangements between the firms and their consultants with other issuers. There is only a prohibition with respect to a contingent fee paid to consultants with respect to State of Illinois financings," Abel said.

The law extends beyond investment banks to financial advisers and legal firms, but contracts that financial advisers and law firm have with consultants are more difficult to track since those businesses are not required to file reports with regulators disclosing their use of consultants. Broker-dealers must submit quarterly reports to the Municipal Securities Rulemaking Board on their use of consultants, their compensation arrangements, and the consultants' political contributions under the agency's G-38 rule.

The state already barred businesses seeking any state contracts from paying consultants who lobby the General Assembly based on their success in bringing in business. The new law extends the reach of the existing ban to include contracts that are influenced by any type of executive or administrative actions.

Lawmakers included the provision in a larger debt reform package pushed by Democratic House Speaker Michael Madigan and the Senate Republican minority leadership as a means to curtail the governor's borrowing practices of the last 18 months.

The move to include the contingency fee ban was in direct response to the shock expressed by lawmakers and political watchdog groups at the disclosure by Bear, Stearns & Co. Inc. in its third quarter 2003 G-38 filing of an $809,000 payment to Springfield Consulting Group LLC. The payment was in connection with the firm's work as the lead bookrunner on Illinois' $10 billion taxable general obligation pension sale in June of 2003. The compensation arrangement called for Springfield to receive 10% of the firm's net revenues on the deal and it received $8 million.

"There were some startling revelations and questions were raised over whether that was the way fees should be charged and does it impact the cost for these transactions," Steve Brown, a spokesman for Madigan, said yesterday.

Although Bear Stearns credited Springfield Consulting with helping secure the deal, it was never clear what work the firm's owner, Robert Kjellander, did to help the state obtain the deal. "More people were probably stunned that it didn't appear that he had done anything," Brown said.

Kjellander is the state's national Republican committeeman and is the chairman of President Bush's midwestern re-election campaign. Kjellander brought to the table a close connection with federal officials through his longtime friend Karl Rove, Bush's chief political adviser. Although Democrats control the Illinois Legislature and the governor's office, Kjellander has former business ties to a top Blagojevich adviser.

Bear Stearns revised its contract with Springfield Consulting prior to the Legislature's passage of the ban this summer, shifting the compensation arrangement to a monthly retainer of $15,000. The firm reported paying Springfield $30,000 during the second quarter of 2004.

The G-38 filing reports that Kjellander is providing advice and developing relationships for state of Illinois business and for business in Kentucky. In addition to the monthly retainer, Springfield may be paid an annual performance bonus. Bear Stearns reported its work as bookrunner on the state's $1.2 billion unemployment fund sale on its filing regarding Springfield.

Lehman Brothers is in the process of reviewing its contract with John Wyma & Associates. Wyma is currently paid a monthly retainer of $15,000 plus a discretionary fee capped at $250,000 based on 105% of net investment banking fees received on underwriting transactions, according to the firm's latest G-38 filing.

The firm reported paying Wyma, a former Blagojevich aide, $45,000 during the second quarter of 2004. Lehman's filing included a report of its work as lead manager on the state's $130 million revolving fund deal this year. "We will be in compliance with Illinois state law," a Lehman official said last week, in response to questions about the change in state regulation.

An ABN Amro Financial Services Inc. official said its contract with Nona R. Myers to help bring in state of Illinois business ended during the quarter so it won't be impacted by the new ban. Myers was paid $8,916 during the last quarter based on a contract that called for a retainer of $3,000 per month plus 10% of additional revenue after ABN me a target of $250,000in net revenues from business in which she was involved. The compensation was capped at $100,000.

An official with Bernardi Securities Inc. said the firm "was reviewing our contracts and will change any to be in compliance with the law." The firm has several consultants that receive some compensation based on the amount of work they bring to the firm. It is unclear from the filing what consultants actually may lobby for state work and firm officials could not immediately provide details on the work of its lobbyists.

Banc of America Securities LLC reported that its contract with Clark Burrus, a former Chicago comptroller and public finance official with the former First Chicago NBD, calls for him to receive 10% of revenues on transactions for services in a designated "geographic area." The firm recently revised the contract but a spokesman declined to provide details of the revisions. "We are aware of the Illinois legislation and when we recently amended our contract with Clark Burrus we took it into consideration," the spokesman said.

A handful of other firms that use consultants to lobby for state business already comply with the law. While William Blair & Co. pays some consultants contingency fees it has long paid its state consultant, Orlando Jones & Associates, a monthly retainer of $9,500 based on the prior ban on contingency fees if the Legislature is being lobbied, according to Blair banker Thomas Lanctot.

Siebert Brandford Shank & Co. LLC paid Vincent Williams $18,000 during the last quarter on a $10,000 per month contract to work on state of Illinois bond issuance. Morgan Stanley & Co. Inc. paid former Blagojevich aide Doug Scofield $15,000 in the quarter based on a $5,000 per month contract.

Raymond James & Associates Inc. pays the law firm Ungaretti & Harris $6,500 per month and UBS Financial Services Inc. pays the law firm $6,000 per month. Both cite the firm's work on helping secure business with the state of Illinois and its agencies. First Albany Corp. pays a monthly retainer of $3,000 to David Stricklin for "Illinois opportunities," according to its filing.

The state's current financial advisers, Kirkpatrick Pettis, Mesirow Financial Inc. and Scott Balice Strategies, do not pay any consultants on a contingency fee basis to lobby for their state positions.

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