WASHINGTON - In a form filed with the Municipal Securities Rulemaking Board, M. R. Beal& Co. listed a nonexistent issuer - the West Basin Uptown Development Authority -instead of the West Basin Municipal Water District in disclosing the payments it made toconsultant Garland Hardeman in the third quarter of 2001.
The payments are central to charges U.S. attorneys filed last week in a California courtagainst Tyrone Smith, a member of the West Basin Municipal Water District's board ofdirectors. The U.S. attorneys allege that Smith extorted $25,000 from the Beal firmthrough Hardeman in return for assuring that Rice Financial Products Co. would be hiredto do a swap transaction for the district in October 2001 and would pay Beal $250,000.
Officials at Beal and Rice said they are unaware of any such extortion scheme orpayments to Smith.
But U.S. attorneys charged that Hardeman conspired with Smith to hide the extortionscheme and made five separate $5,000 payments to Smith from a $50,000 check he receivedfrom Beal for muni consulting.
In the G-38 form it filed with the MSRB for the third quarter 2001, Beal listed $50,000in payments to Hardeman, but stated they were made in connection with the West BasinUptown Development Authority. Rule G-38 requires dealers to disclose, in quarterlyforms, the consultants they hire to obtain or retain municipal securities business, theconsultants' compensation arrangements, the amounts paid to the consultants, and anycontributions the consultants make to issuer officials. The rule is designed to preventdealers from using consultants to funnel contributions to issuer officials in return formunicipal securities business - something they cannot do themselves under Rule G-37.
Stanley E. Grayson, Beal's chief operating officer, conceded yesterday that the WestBasin Uptown Development Authority does not exist and said the listing of thenonexistent issuer was the result of a clerical error.
Grayson claims that firm officials directed a secretary to list a $38,000 payment toHardeman made in connection with the West Basin Municipal Water District and a $12,000payment made to the consultant in connection with the Houston Uptown DevelopmentAuthority. The secretary got the names mixed up on the form, Grayson said.
The $38,000 paid to Hardeman, a former Inglewood, Calif., City Council member, wasroughly 15% of the $250,000 that Beal got from Rice, Grayson said. Under his contractwith Beal, Hardeman was to be paid a $1000 retainer fee and, among other things, 15% ofany of the total gross management fees from transactions.
Christopher Taylor, the MSRB's executive director, would not comment on Beal's form, butsaid generally, "If someone has made an error on their form, they are obliged to correctit as soon as possible, otherwise they are held accountable by the National Associationof Securities Dealers for filing an incorrect form.
Bernard B. Beal, the firm's chief executive officer, told The Bond Buyer late last weekthat Beal had "an arrangement with Rice Financial to help look for a couple of swaps"and that it was to be "without regard to whether they got anything or not."
Yesterday, J. Donald Rice Jr., the president and chief executive officer of RiceFinancial, which is also based in New York City, said he agreed with Beal's description,but added, "The transaction that was executed was executed as a result of a jointproposal between Rice and M.R. Beal."
Beside the federal charges against Smith, the swap has become central to a lawsuit thatthe West Basin Municipal Water District filed late last month in a California courtagainst Philadelphia-based P.G. Corbin & Co. and one of its former vice presidents,Lennard Cuenco.
The district claims the Corbin firm and Cuenco misrepresented to the district that theswap was a fair market-value transaction. According to district officials, the firm andits former official insisted that Rice's profits from the swap were incalculable, butcertified that the swap was a fair market-value transaction. However, two derivativesfirms hired recently by the district concluded that Rice's profits were much higher thanthe industry norm and that had Rice's profits been factored into the valuation, the swapwould not have been found to be fair-market value.
The district has had a total of about $1.5 million in cost savings from the swap sinceOctober, 2001. However, an audit of the district's fiscal year ending July 2002 statedthat the district had an unrealized and unrecorded loss of approximately $13.6 millionin connection with the swap based on interest rates in effect on June 30, 1992.
However, Rice maintained yesterday that it is the cost savings that are important andthat the unrealized losses represent the termination cost and only come into effect ifthe swap is terminated - something that cannot be done unless some unexpectedcatastrophic event occurs.
Rice also insisted, "It is not possible to calculate the final profit on a long-livedinterest rate swap transaction until the financial results have been fully realized atthe end of the transaction. Moreover, it is not possible to know the related long-termcosts, such as for hedging, credit offsets, operational expenses, and legal and otherexpenses."
