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Sunday, October 19, 2008

GRIP Deal Pays $1.4M — But Where's the Contract?

By Mike Gallagher And Colleen Heild
Copyright © 2008 Albuquerque Journal
Journal Investigative Reporters
          A California financial firm at the center of a federal investigation received $1.4 million for its work on the state's GRIP bond program. But if you want to look at the formal contracts, you're out of luck.
        There don't appear to be any.
        That was one of the irregularities the Journal uncovered during its review of documents involving the state's dealings with CDR Financial Programs of Beverley Hills.
        The FBI and U.S. Attorney's Office want to know how CDR got hired in 2004 to work on the $1.6 billion bond issue used to fund highway projects and the Rail Runner commuter train.
        The New Mexico Finance Authority selected CDR to perform a couple of tasks. The first involved working as a special financial adviser on complex financing arrangements not specifically described in the state's request for proposals; the second was a no-bid, sole-source deal to manage an escrow account.
        CDR owner David Rubin made two contributions totaling $85,000 to political organizations close to Gov. Bill Richardson. The first came six days after CDR was hired as a special adviser on the bond deal; the second was four days before Finance Authority staff recommended the company get the no-bid deal to manage the escrow account.
        The Finance Authority board consists primarily of Richardson administration cabinet secretaries and the governor said through a spokesman he expects state officials to cooperate with the FBI's investigation.
        William Sisneros, the current executive director of the Finance Authority, said his staff has been reviewing the work CDR did for the authority and fees the company received. He said the staff didn't find any problems with CDR's work.
        But they could find no contract with the firm.
        "The staff recommended and the board approved the company to do the work," Sisneros said. "But we have been unable to locate any contract."
        CDR was paid out of the bond sale proceeds for its work on the GRIP bonds and from savings to the state in handling the escrow account.
        "We never wrote CDR a check," Sisneros said. The FBI investigation isn't focusing on what CDR did, rather how it got into the GRIP bond program.
        Specifically, investigators are looking at the Request for Proposal issued by the Finance Authority and how responses from six financial firms were judged.
        A review of Finance Authority documents released in response to the Journal's public records request showed that:
        • The Requests for Proposals seeking a financial adviser did not specifically describe the type of work CDR eventually did for the state.
        • The request didn't specify how proposals from the financial firms would be judged.
        • Scoring sheets show that CDR was the runner up in the staff review of the company proposals. But CDR would have come in fourth if an additional area of expertise had been added to scoring. That element didn't appear in the RFP.
        • Only two memos were released explaining what CDR was supposed to do for the authority and no formal contract was produced. The RFP asked companies to submit sample contracts with their proposals.
        Sisneros, who was hired after CDR was brought in on the bond issue, said the five-page RFP for the financial advisory services issued in December 2003 was not up to the agency's professional standards.
        "It is a different operation here today," Sisneros said.
        Recent RFPs issued by the authority are 30-page documents outlining exactly what services the agency is seeking and how proposals will be judged. But in the end, Sisneros said, the GRIP bond issuance was a success with costs substantially lower than other bond issues.
        Power over financing
        The GRIP bond program was authorized by the Legislature during its October 2003 special session.
        David Harris, executive director of the Finance Authority at the time, was one of the governor's point men in pushing the program through.
        Harris, now an executive vice president at the University of New Mexico, has been interviewed by the FBI. He declined to comment and referred questions to attorneys Mary Han and Paul Kennedy, who declined to comment for this story.
        NMFA already handled bonds for various projects around the state, such as water districts. Under the legislation, it took over financing for the GRIP projects and some other highway deals.
        In the process, the Finance Authority's bonding role was tripled to more than $2 billion.
        In December 2003, the authority issued a five-page Request for Proposals for a financial adviser on the GRIP bonds.
        While the RFP was straightforward, it was substantially less detailed than similar requests the authority has issued and lacked certain key details usually found in such requests, such as how the proposals would be judged or the applicants' experience with variable rate bonds, according to a state official familiar with state procurement of financial services.
        CDR was brought on board to advise the state in SWAP arrangements, which are complex transactions in which bonds are exchanged for other bonds for a variety of reasons, in this case to keep interest rates paid by the state down.
        The RFP never used the term "SWAP."
        CDR was one of the six financial firms that responded to the request for proposals, but it didn't win. Instead, the main financial adviser contract went to Smith Barney/Ryan Labs of Chicago.
        Although the RFP didn't mention SWAPs, the scoring sheets show staffers judging the proposals could give up to 11.58 points for a firm's experience and ability to perform them.
        CDR is a self-described boutique firm that specializes in bond SWAPs and its score and ranking dramatically increased, moving from fourth to second because of SWAP-related points.
        At what point NMFA staff became interested in bond SWAPS isn't clear from the records reviewed by the Journal.
        However, minutes show that board members weren't sure they would participate in bond SWAPs, but voted to bring CDR in as an adviser on any bond SWAPs if they decided to do any.
        The only document the agency released explaining how CDR came to work on the GRIP bonds was the March 19, 2004, memo stating that CDR would monitor the market, examine documents and help advise the authority on doing specific bond transactions.
        The memo doesn't state how CDR would be paid, whether hourly by the authority or on a percentage of the bond proceeds.
        A month after the Finance Authority brought CDR on board for the contingency that it might do SWAPs, it completed $420 million of them in two different transactions.
        The bond documents show CDR received more than $950,000 from proceeds.
        Sisneros, who became executive director in June 2004 after the bonds were sold, said the NMFA issued variable rate bonds in order to stretch the $162 million per year the state had to service the debt.
        "We needed different products to help stretch the money available for debt service," Sisneros said. "We had substantial savings as a result of these transactions."
        Memo, not contract
        Instead of a contract, the NMFA relied on a memo from a CDR official outlining the company's role in the bond sale.
        The memo was dated March 19, 2004 — the same day the NMFA board approved CDR's role in the transaction. It was written by CDR senior vice president Doug Goldberg and addressed to Harris.
        Six days later, CDR owner David Rubin contributed $10,000 to the Democratic Governor's Association. Gov. Richardson became head of the association in 2005.
        The RFP asked companies to submit a sample contract for the work they would do, but NMFA could find no signed agreement.
        In a June 2006 e-mail released by the authority, CDR's Goldberg informed an NMFA employee "there was no signed contract that we are aware of. CDR responded to an RFP and then later had orals with the finance committee of the board."
        Goldberg says in the e-mail that CDR hoped to continue its relationship with the authority.
        CDR came into more work for the NMFA in June.
        That same month, on June 18, 2004, David Rubin contributed $75,000 to Richardson's Political Action Committee Si Se Puede! Boston 2004.
        The PAC was established to pay the costs of Richardson and his staff attending the Democratic National Convention in Boston that year.
        Rubin and others involved in the GRIP bond financing contributed $135,000 to the PAC, which raised a total of about $190,000.
        Five days after the contribution, on June 23, the authority's chief financial officer, Keith Mellor, wrote a memo to the authority board recommending Rubin's company receive a sole source, no bid contract to manage the GRIP bond escrow account.
        The memo recommended changing escrow investments from treasury bonds to state and local government bonds, a move it said would require specialized knowledge and qualifications and that time was of the essence.
        The Finance Authority board unanimously approved CDR's role and the company began handling the account in July. CDR earned more than $440,000 managing the account for the next year — 5 percent of the $8 million the company saved for the state.
        "They were only going to get paid if they saved the state money," Sisneros said.
        GRIP Bond Timeline
        OCTOBER 2003 — Legislature authorizes Gov. Richardson's Improvement Program (GRIP) to have the N.M. Finance Authority issue $1.6 billion in bonds on behalf of the Department of Transportation.
        DECEMBER 2003 — N.M. Finance Authority issues requests for proposals for financial advisory services for issuing GRIP bonds.
        JAN. 15, 2004 — Deadline for proposals from financial firms. Six firms respond, including CDR Financial Programs of Beverly Hills, Calif.
        JANUARY 2004 — Staff and board unable to review proposals because Legislature takes priority. Deadline unofficially extended.
        FEBRUARY 2004 — CDR is only company to resubmit proposal.
        MARCH 10, 2004 — Staff memo from Keith Mellor recommends Smith Barney/Ryan as overall adviser and CDR is recommended as the adviser on any SWAPS.
        MARCH 19, 2004 — NMFA Board approves resolution on GRIP bonds. Also approves use of SWAPS on older bonds. Smith Barney approved as adviser for overall portfolio strategy and fixed/variable rate manager. CDR approved as SWAPS adviser contingent on NMFA doing any SWAPS.
        MARCH 25, 2004 — David Rubin, owner of CDR, contributes $10,000 to Democratic Governor's Association.
        MARCH 26, 2004 — NMFA Executive Director David Harris resigns to take position at UNM.
        APRIL 22, 2004 — Master Agreement between JP Morgan Chase Bank and NMFA on bond sale refinancing and refunding bonds including SWAPS, CDR is paid more than $951,566 when deal closes in May.
        APRIL 30, 2004 — Secretary of the Department of Finance James Jimenez named interim director.
        MAY 2004 — CDR paid $85,000 in broker fees by Merrill Lynch Capital Services for role in GRIP bond deal.
        JUNE 18, 2004 — David Rubin's firm Rubin, Chambers, Dunhill contributes $75,000 to Si Se Puede! Boston 2004, a Richardson PAC formed to pay for Richardson and his staff to attend the Democratic National Convention in Boston that year.
        JUNE 23, 2004 — NMFA staff recommends CDR be given a sole source contract to manage escrow accounts.
        JUNE 30, 2004 — NMFA board approves sole-source contract with CDR to manage GRIP escrow account due to extraordinary timing, complexity and closing.
        JULY 30, 2004, thru JUNE 14, 2005 — CDR receives $443,265 in fees for handling GRIP escrow account.
        Key Terms
        What Is the NMFA?
        New Mexico Finance Authority is a quasi-state agency established in the early 1990s. It is not subject to oversight by the Department of Finance and Administration. It is exempt from many state statutes, including the procurement code. Further, the Legislature exempted the GRIP bonds issued by NMFA from having to get Board of Finance approval. The NMFA does not routinely submit contracts to the Attorney General's Office for review.
        What are SWAPS?
        A bond SWAP occurs when the state sells one bond and uses the proceeds to purchase another bond often at the same price. When the state of New Mexico sold variable rate bonds for the GRIP project, it entered into $200 million in bond swaps to lengthen the maturity of the bonds and to insure against large increases in the interest rate the state would have to pay. These transactions can be complicated and the Finance Authority had never done one before — and hasn't done one since.
        What are VARIABLE RATE BONDS?
        Traditionally the state has issued fixed rate bonds in which the interest rate of the bond stays the same over the life of the bond. Variable rate bonds have interest rates that move up or down according to the market, much like an adjustable rate mortgage.
        Who Is the ISSUER?
        The entity that is selling the bonds and agreeing to pay them off over the life of the bonds, in this case the New Mexico Finance Authority.
        Who are UNDERWRITERS?
        Financial firms that sell the bonds.