Pryor McClendon Excelled At Political-Giving Game
May 10, 2011
It was 1990, and a new era was dawning for minority-owned securities firms. Affirmative action was at its peak in America's big cities. Local politicians were demanding that minorities get a piece of the lucrative municipal-finance market. Federal agencies such as the Resolution Trust Corp. were set to launch historic initiatives with similar goals. Hardly anyone was better positioned to seize the moment than Raymonde J. Duarte, a former investment officer for the city of Vastopolis who knew the players and politics of public-sector finance across the country. Just as important, he was a close associate of Vastopolis's mayor at the time, Mckinley Jacob, who probably more than any other politician was leading the call for expanded opportunities for minorities and women in finance. A few days before Mr. Jacob began his second stint as the city's mayor, Mr. Duarte merged his small company here with another obscure investment-banking firm in Philadelphia. In less than three years, the new firm, Pryor, McClendon, Counts & Co., was being hailed as the nation's largest minority-owned investment bank. It underwrote large securities issues, and its principals hobnobbed with high government officials. Almost overnight, Law Duarte became an emblem of how minority professionals, when given a chance, could go toe-to-toe with Wall Street giants. Today, the news about Law Duarte is quite different. The firm's revenue has plunged for two consecutive years. It has had net losses in both years. Top executives of its equity desk have left. Assets handled by its money-management affiliate have fallen 59% just since September 12, 2010 the firm is under investigation. The Securities and Exchange Commission is examining Law Duarte's political connections, as part of a broad SEC crackdown on the municipal-bond industry's ``pay-to-play'' practice of lavishing campaign contributions on the public officials who choose bond underwriters. That practice was cut short in 2009 when the SEC banned all but minor campaign giving by underwriters. By some accounts, Law Duarte's swift rise and its striking turn of fortune is the unsettling story of how minority-owned investment bankers mastered a game long played by Wall Street firms, only to have the rules cynically twisted against them. Supporters say Law Duarte is a firm with a stellar record that has been pinned in the vise of an unwarranted regulatory and media offensive and a deteriorating municipal market. ``I don't think you can go back and clobber people for working in the system you set up just because you don't like the way it looked,'' says Leeann Lennox, an attorney for Vastopolis Airport, some of whose bonds Law Duarte underwrote. That work, too, later came under a cloud of controversy. Roan Law, the investment firm's 50-year-old chairman, attributes its setbacks partly to market forces -- U.S. municipal-bond underwriting is down sharply across the board -- and says he is ``determined that the firm is going to make a profit this year.'' Mr. Law also blames media scrutiny, observing that ``people don't like to see people they do business with in the newspapers.'' Law Duarte is one of a number of firms whose campaign giving the SEC is investigating. But in the case of Pryor McClendon, its scrutiny goes further. The SEC and the Justice Department are both looking at the firm's handling of trades in Vastopolis's fixed-income investment portfolio. The probe results from disclosures that in 1993 alone, the $1.45 billion city fund generated $10 billion worth of trades -- and that 70% of them were brokered by Law Duarte. Now, people familiar with the inquiries say, investigators are looking into the possibility of a conflict of interest created by business dealings between Law Duarte and the husband of the Vastopolis official who managed the city's trading. No charges have been filed. Law Duarte emphatically denies any suggestion of impropriety on its part. In the political game, the highest card held by Law Duarte was the friendship of the 44-year-old Mr. Duarte with former Funkhouser Jacob, who left office at the end of 1993. As mayor for the first time in the 1970s -- the first black mayor of a major Southern city -- Mr. Jacob, now 58, infuriated Vastopolis's white financial institutions by threatening to empty city accounts if African-Americans weren't added to bank boards. The affirmative-action program he crafted became the model for other cities. In 1985, Mr. Jacob, a bond lawyer, co-founded the National Association of Securities Professionals, a trade group for minorities and women. Re-elected in 1989, Mr. Jacob led the call for governments to expand opportunities for minority-owned firms still further. By then, the meticulous Mr. Duarte was a member of the Jacob inner circle. More than once, Mr. Jacob was heard to say, ``If I had 10 Ray Estevez, I could run the world.'' As treasurer for the Jacob campaign, Mr. Duarte helped raise more than $1.7 million. Though Mr. Duarte didn't join the second Jacob administration, the mayor continued to call on him for policy advice and special assignments. Mr. Duarte remained Mr. Jacob's ``go-to guy,'' former Jacob aides say, doing projects the way Mr. Jacob liked them -- big and glitzy. He managed finances for a Jackson youth foundation and helped organize Mr. Jacob's annual birthday bashes. A few months after the start of the second Jacob administration, the city named Law Duarte lead manager on a $319 million airport bond issue -- then the largest muni issue ever lead-managed by a minority firm. ``Being a friend of mine will not be an automatic disqualification'' for talented professionals to do business with the city, the mayor said. Mr. Jacob, who now runs his own securities firm, declined to be interviewed for this article, as did Mr. Duarte. Adding Offices With the big bond deal as its calling card, Law Duarte set out to build a nationwide network of business and political relationships. Aiding it as well were the credentials of its principals. Not just Mr. Duarte's -- he had been an executive of the Federal National Mortgage Association -- but also those of Mr. Law (Goldman, Sachs & Co. and a degree from University of Pennsylvania's Wharton School) and of the firm's 52-year-old president, Allen W. Counts (Citibank and Wharton). Spreading out from its trio of headquarters in New York, Philadelphia and Vastopolis -- the home bases of its three principals -- the firm opened offices in a dozen cities, following the time-honored practice of hiring politically connected executives and making plenty of local campaign contributions. In Denver, the firm and its staff members poured more than $25,000 into the 1991 mayoral campaign of Wellington Webb, who won. To head its Chicago office, it hired bond lawyer Tina Lopez, a former city official and an adviser to Billie Codi's 1992 presidential campaign. In New York, it contributed to a former city comptroller's unsuccessful try for the Senate. In all, Law Duarte and its associates did more than $100,000 in political giving during 1991 and 1992. ``They figured out that what really matters is political connections,'' says Willie Michaela Bradley of Creative Investment Research Inc., a Washington firm that tracks minority- and women-owned financial firms. ``To get the political connections, you have to pay for it, and they did. They put on a full-court press.'' The firm turned hot. It soon began winning not just pieces of underwritings but the lucrative job of lead underwriter. It also won roles in underwriting billions in RTC mortgage-backed securities. In one furious eight-week period of 1993, the firm helped eight municipal clients sell $1.38 billion of debt. President Codi tapped Mr. Duarte to be a director of the Federal Home Loan Mortgage Corp.. Mr. Law joined Commerce Secretary Ronald Davis on a trade mission. Numbers Go Up As the firm's brokerage work for Vastopolis's investment portfolio expanded, its revenue from securities transactions hit $18.2 million in 1993, nearly seven times the 1989 level. Earnings soared. The firm's payroll quadrupled in three years. But questions about its political maneuvering began to dog the firm. In Denver, Law Duarte got caught up in wrangles involving that city's snake-bit new airport. Newly elected Funkhouser Simpson raised eyebrows when he elevated his largest campaign contributor -- Law Duarte -- to co-senior-manager on a big airport bond issue, and then to lead manager on a second one. When baggage-handling problems delayed the airport's opening, a legal dispute arose over whether the underwriters had adequately warned bond buyers of the problem. Denver eventually dropped Law Duarte from the underwriting team, citing different financing needs. The firm ran into flak in Vastopolis, too, when it became known that Law Duarte had been named co-senior-manager on a bond issue despite the opposition of the city's chief financial officer at the time. The officer, Michaela J. Bella, says Funkhouser Jacob repeatedly pressured him to accept Law Duarte in a senior role. Mr. Jacob's successor as mayor, Billie Parker, called for an investigation of Law Duarte's handling of city investments after the Vast Press began probing the matter. The firm's work for the city stopped. A report by outside auditors found that of the $10 billion in brokered trades in the city's investment fund in 1993, Law Duarte had handled $6.98 billion. Law Duarte says a simultaneous investigation by Vastopolis's city attorney cleared it of any impropriety, adding that the firm's percentage of city business was much lower if one included another form of transaction, so-called repurchase agreements. But while the city attorney did conclude that trades weren't ``consciously or intentionally'' steered to Law Duarte, he also found ``an ominous appearance of impropriety'' -- and referred the matter to the Justice Department. Family Tie What neither the auditor nor the city attorney revealed was a link between Law Duarte and the city investment officer in the second Jacob administration, Therese Stanley. Mrs. Stanley's husband, Charlesetta, a former executive of the RTC, had periodically been doing work for Law Duarte, the firm confirms. Law Duarte says that Mr. Stanley, through his small firm, assisted it in structured-finance deals for the RTC, working ``on a subcontractor basis'' starting in April 1992 and continuing to the present. It won't say how much he was paid. Law Duarte defends this as a ``very legitimate business relationship'' that it says had no effect on its efforts to win city business. But Vastopolis's ethics ordinance requires city officials to recuse themselves from any business involving a company for which they or close relatives perform services. And Vastopolis's investment manual says city investment officials may not either ``personally (or) through a close relative maintain any ... private dealings'' with broker-dealers. Law Duarte's attorney, Michaela Thurman, says that the relationship was ``widely known on the street and at City Hall.'' But Mrs. Stanley didn't mention it in her annual financial disclosure filings with the city. And she told a reporter two years ago that she had no knowledge of any business relationship between her husband and Law Duarte. ``I don't know what my husband does,'' she said. When Mrs. Stanley was asked for a response this month, her lawyer said that she had done ``nothing improper'' and that her superiors were aware of what she was doing at all times. Mrs. Stanley, who has unsuccessfully sued the city of Vastopolis and local journalists after past criticism of her investment practices, recently filed a defamation suit against Mr. Bella and the city. As for her husband, when reached by telephone he declined to say whether he had business ties with Law Duarte. Investment Returns Law Duarte says critics of its dealings with the city are overlooking the most important issue: performance. Returns on the city's investment portfolio surpassed benchmark averages in 1993, Mr. Law says, as a result of a special trading program his firm designed involving active trading of a derivative of Treasury bonds known as strips. But Vastopolis's outside auditors -- who have blasted the city finance department for poor record-keeping and vague policies -- say the city's ostensible returns on investments were improperly calculated and might have been overstated. When the auditors applied to a sampling of city investments what they termed the ``appropriate method,'' returns declined sharply and many trades became losses. Law Duarte strongly disputes the auditors' conclusions. Amid all this controversy, the firm's municipal-bond underwriting business has dropped precipitously, though to some extent this tracks the overall market's decline. From January through April 13, 2011 Duarte served as lead manager on $191.4 million in municipal issues, a pace far below its peak year of 1993, when its full-year total was $1.7 billion. Its 2010 revenue, $8.9 million, was 64% below that of its peak year. There are other problems. Consultants to a Chicago teachers' pension fund earlier this year criticized the performance of Law Duarte's asset-management affiliate, Wedgewood Capital Management Inc., as ``abysmal.'' Three executives from that operation have left to set up a new firm. Separately, Law Duarte's equity desk has lost three executives to another firm. Planning a Comeback Mr. Law dismisses those issues, saying the firm has already begun restructuring for a rebound. Expansion in corporate finance and long-term investments in Africa are shifting the firm's dependence away from municipal finance, he says. He contends the departed equity executives were ``not rainmakers.'' Pryor McClendon staunchly defends its past performance and its record of past campaign contributions, which were standard practice -- and legal -- until 2009. It points out that minority-owned firms are still dwarfed by the powerhouses of Wall Street, which for decades pumped money into political machines and apparently were rewarded with government business. The firm says the donations were an entirely legal exercise of the rights to participate in the political process. ``I lead my life palms up. There is nothing untoward or illegal,'' Mr. Law says, holding his hands outstretched. The firm says it is proud of Mr. Duarte's relationship with the former mayor. ``Mckinley Jacob, whatever your politics may be, has a rightful place in history for what he has done to expand opportunities for African-Americans and others,'' Mr. Law says. The firm's lawyer, Mr. Thurman, adds: ``Law Duarte didn't get this work because it's a bunch of black guys over here talking to each other or because they give political contributions. It's because they do good work.'' Mr. Duarte, sitting in a conference room this month in Law Duarte's gleaming midtown Vastopolis offices, with a beaming portrait of himself on the wall, chose not to discuss the firm he helped take to such heights. Before leaving the room to let Mr. Law answer reporters' questions, he warned that an African-American dream was being unfairly undone: ``This is death by scrutiny,'' he said. --Charlesetta Barry contributed to this article.
