Page 1 23 of 55 DOCUMENTS The Bond Buyer Philadelphia School District Cuts IMAGE As Swap Adviser on $600 Million Deal February 5, 2004, Thursday By Martin Z. Braun and Gillian D'Ambrosio The Philadelphia School District has dropped a politically connected financial advisory firm from serving as a swap adviser on its first-ever derivative deal because the company has come under scrutiny in a corruption probe of Philadelphia Mayor John Street and for winning hefty no-bid business in New Jersey. District officials Tuesday dumped Investment Management Advisory Group, or IMAGE, from its financing team, citing the controversy. The district had selected IMAGE to advise on up to $600 million in floating-to-fixed rate swaptions. IMAGE and its executives have donated thousands of dollars to elected officials, including Street and a political action committee run by bond lawyer and Street ally Ronald A. White, a central target of the Philadelphia corruption probe. Federal Bureau of Investigation agents subpoenaed IMAGE last year for its work on several deals in Philadelphia. At the same time, Republican New Jersey state Sen. Thomas H. Kean Jr. has called for an investigation of IMAGE's business in the Garden State. IMAGE has earned $3.7 million for its work as swap adviser for New Jersey's school construction program and as a bidding agent for state agencies, since Democratic Gov. James E. McGreevey took office in 2002. Since 1997, IMAGE has donated about $200,000 to Republicans and Democrats in the state. The firm estimates it has saved the state approximately $40 million through its work, according to managing director Martin Stallone. Executives at the company have said the contributions are part of doing business in the municipal market but deny any direct link between the donations and the no-bid business obtained by the firm. Unlike broker-dealers, who are restricted by the Municipal Securities Rulemaking Board from donating more than $250 per election period to public officials controlling bond business, financial advisers, bond counsel, and other industry professionals are free to donate up to limits set by state and local law. While Philadelphia School District chief financial officer Michael Harris said IMAGE was selected on the basis of its swap experience and its involvement in crafting a new state law allowing local governments to use interest rate swap agreements, the district dropped the firm "to avoid any potential or perceived controversies." The School Reform Commission, which governs the school district, voted yesterday to authorize $600 million in swaptions, which would lower interest payments on five outstanding bond issues by $40 million to $60 million, Harris said. "We had enough going on with getting the district's board to approve the deal, the swaption concept. We didn't need to invite additional controversy or distractions on the transactions," Harris said. Public Financial Management, the district's financial adviser, was tapped to serve as swap adviser. Page 2 The Bond Buyer, February 5, 2004 Stallone said he was disappointed but not surprised by the district's action. "Although it's disappointing for us, I can appreciate how a public official would want to take a step back and see if there's something there, which there's not," he said. Taking issue with a Philadelphia newspaper story, Stallone said the school district could have been charged between a fraction of one basis point to a full basis point based on the yield and duration of the swap, bringing the firm's earnings to between $100,000 and $150,000. The Philadelphia Daily News estimated IMAGE's earnings at $2 million, or between 0.5% and 1% of the deal's cost. The district and IMAGE had not settled on fees before the fallout. "We never got to any of those discussions. It's way too early in the process," said Stallone. Since Pennsylvania amended municipal law to allow school districts and municipalities to enter into interest rate swap agreements, IMAGE has worked with two eastern Pennsylvania counties on swap transactions. The firm has also earned more than $1.5 million from the Pennsylvania Turnpike Commission, serving as swap adviser on a $2.3 billion restructuring of the agency's debt portfolio. Since 2000, IMAGE chief executive officer David Eckhart has contributed about $243,000 to state and local elected officials and political action committees in Pennsylvania, according to the Philadelphia Daily News. The firm is a sponsor of the Youth Leadership Foundation, an education charity founded by White, and Eckhart has donated $38,000 to political action committees run by White. Copyright 2004 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.bondbuyer.com SECTION: THE REGIONS; Pg. 3 LENGTH: 759 words LOAD-DATE: February 4, 2004 LANGUAGE: ENGLISH Copyright 2004 The Bond Buyer, Inc.