SAN FRANCISCO — A California appeals court recently rejected demands by the state’s largest conduit bond issuer that one of its former attorneys and employees — who now works as an investment banker for Banc of America Securities LLC — be barred from working on deals involving a competing issuer.
The lawsuit and its associated paper trail provide a window into the competitive world of California conduit bond issuers.
The suit was brought by the California Statewide Communities Development Authority.
The First District Court of Appeal in December affirmed a lower court ruling that the CSCDA had no grounds to seek an injunction barring Banc of America banker Lawrence Tonomura from working on deals involving other conduit issuers, including the California Municipal Finance Authority.
The CSCDA is a joint-powers authority organized under a California law that permits two or more public agencies to form an entity that can jointly exercise any powers they all possess, including the power to issue bonds.Conduit issuers like the CSCDA typically serve as the governmental issuer for such deals as private-activity bonds and bonds for 510(c)(3) nonprofit organizations. The authority also issues pooled bond issues on behalf of governments joining forces for efforts that include tax and revenue anticipation notes, pension obligation bonds, and water and wastewater projects.
The two-decade-old CSCDA has become a bond issuance powerhouse. In 2007, it was the nation’s fifth largest debt issuer by volume, credited by Thomson Financial with more than $4.3 billion through 71 issues.
The CSCDA’s dispute with Tonomura appears to stem from the authority’s concern over the emergence of a much smaller conduit issuer: the California Municipal Finance Authority, which was founded in 2004.
The CSCDA went to court that year to seek an injunction barring Tonomura from “engaging in any activities that are in competition with those of CSCDA,” including work with the CMFA.
Tonomura was an attorney with Orrick, Herrington & Sutcliffe LLP between 1991 and 1998, where his clients included the CSCDA.
After leaving the legal practice in 1998, he began working as a non-lawyer consultant, and later employee, of the CSCDA through HB Capital Resources Ltd., the private firm that staffs and operates the authority.
Tonomura left HB Capital and the CSCDA in 2001 to join Banc of America Securities.
The CSCDA argued that, as a result of his past legal work for the authority, Tonomura violated his fiduciary duty and his professional duties of confidentiality, even though he was no longer working as a lawyer.
The CSCDA’s complaints stemmed from what the authority described as Tonomura’s central role, as a Banc of America banker, in the creation of the CMFA. The CSCDA’s original lawsuit, filed in Contra Costa County where the authority is based, also named another former Orrick attorney, Ana Marie del Rio, who was soon dropped from the suit.
In 2006, the trial court granted Tonomura’s request for a summary judgment dismissing the CSCDA lawsuit, a ruling that was affirmed in December by the Court of Appeal.
“CSCDA has failed to identify any material facts, which if proved at trial, would entitle it to injunctive relief,” according to the Court of Appeal ruling authored by Judge Jeffrey Horner on behalf of a unanimous three-judge panel. Horner ordered the authority to bear the costs of appeal.
The ruling was not certified as a published opinion, meaning it cannot generally be cited as precedent.
According to testimony cited in the ruling, and e-mails and other documents gathered as part of the discovery process, the genesis of the CMFA came from a deal Tonomura was putting together for Waste Management Inc. to finance vehicles and above-ground natural gas fuel tanks.
Tonomura suggested the creation of a new financing authority because the CSCDA board was reluctant to finance a project involving ownership of a hazardous asset.
But e-mails between Tonomura and participants in the creation of the CMFA indicate they felt the new authority could potentially have a larger scope.
A 2003 e-mail to Tonomura from Orrick partner William Bothwell — who went on to serve as the CMFA’s general counsel until late 2004 — counseled Tonomura to at least initially focus on the initial Waste Management deal, while making reference to “grandiose thinking” about larger plans.
“I return to my basic mind-set of wanting to stay beneath the radar screen and that means as well not fantasizing too much,” Bothwell wrote.
Tonomura and the early planners of the CMFA appeared to be concerned about the CSCDA’s competitive response, according to other e-mails they exchanged.
In May 2004, before CMFA was incorporated, a series of e-mails was exchanged between Tonomura and Ron Jones, a principal in the financial advisory firm that would go on to operate the CMFA, after Stephen Hamill of HB Capital, the firm that manages the CSCDA, contacted Tonomura to ask about the new entity.
“I’m sure what bothers HB Capital the most is that they are unsure about how CMFA could affect them,” Tonomura wrote in an e-mail dated May 29, 2004. “They want info to determine how to defend or attack to preserve market share. I would suspect that they will attack and will use their resources to attempt a block on CMFA, that has been their past M.O.”
Jones, in his reply, said: “I believe they have a great fear about the impact you can have (already have) on their business. I also am very concerned that Orrick will accede to their demands or cut a new deal with them and CMFA will be abandoned by Orrick.”
Such concerns do not appear to have been misplaced.
In late 2004, the CSCDA filed the lawsuit against Tonomura, and Orrick resigned as general counsel.
In a December 2004 e-mail to Jones, Tonomura said he had lost a deal he had been working on in Kern County for Synagro, a biosolids company, that was to have been issued through the CMFA.
“According to Synagro, Kern County called to talk about why the company was not using the CSCDA,” Tonomura wrote. “It was also reported to me by Synagro that Kern County was not going to proceed on the transaction if it meant that debt for the project was to be issued through some entity other than the CSCDA.”
As a result, Wells Fargo stepped in to take over the deal from Banc of America Securities, Tonomura wrote, adding: “I am closing my books with a significant loss of revenues on this transaction (over three months of work).”
He was asked about the e-mail in a December 2006 deposition. “I felt that it would be detrimental to Synagro for me to proceed as their investment banker with this financing going through the CSCDA,” Tonomura said.
In a 2006 deposition for the case, Orrick’s Bothwell was asked if conduit issuers compete.
“Public bodies aren’t supposed to compete, yet I suspect there is some of that going on,” he replied.
The CSCDA, in its lawsuit, argued that Tonomura’s work with the agency as an Orrick attorney gave him access to confidential information that he improperly used in playing “a major role in the conception, initiation, organization, formation, and operation of CMFA.”
The CSCDA argued that Tonomura’s experience there as a lawyer, among other things, was responsible for the decision to organize the CMFA by having a private firm act as its financial adviser and staff, the same way the CSCDA is organized.
Tonomura’s attorneys, among their arguments, said that his work with CSCDA as an Orrick associate, under the supervision of partners, was not as significant as the CSCDA portrayed it, that it did not provide him with confidential information. In any case, they argued that Tonomura would have learned far more about the CSCDA during three years as a non-lawyer consultant and employee of the authority’s manager, HB Capital.
They also said that the CMFA was not a “virtual clone” of the CSCDA, as the latter claimed, arguing that there are fundamental differences, including the new issuer’s policy of rebating 25% of issuance fees to the jurisdiction that holds the public hearings required before a conduit bond issue, and contributing another 25% to charitable organizations.
They also said that, as an investment banker, Tonomura does not have any management role or financial interest in the CMFA and questioned why the CSCDA filed a lawsuit singling out Tonomura and ignoring its long-time law firm, Orrick, which served as the CMFA’s general counsel during its startup phase when its legal groundwork was prepared.
In the end, the trial and appellate judges found it unnecessary even to weigh any of the disputed facts about Tonomura’s role with either authority.
They simply ruled that there was no legal basis to issue an injunction restricting Tonomura’s future work, since the CSCDA could not demonstrate that it faced any future injury from Tonomura.
“Whatever Tonomura’s role in its inception, the existence of CMFA is now a ‘done deal,’ in colloquial terms,” Horner wrote.
In 2007, the CMFA issued $499 million in bonds over 11 issues, according to Thomson Financial.
Tonomura did not directly reply to a request for comment. “We’re pleased that the court has now ruled in Mr. Tonomura’s favor at both the trial and appeal court levels,” said Shirley Norton, a spokesman for Banc of America Securities.
CSCDA general manager Jerry Burke did not return a phone call. The authority’s attorney in the case, Dan Carroll, said Wednesday that no decision has been made about an appeal.