The so-called "pay-to-play" municipal finance racket appears headed out the window, and with it a bountiful source of campaign money for elected officials throughout the United States--including Denver mayor Wellington Webb.

Within the next few weeks, the Securities and Exchange Commission in Washington, D.C., is expected to enact a rule virtually barring cities from giving bond-underwriting contracts to investment banks that contribute to local political campaigns. The new rule is designed to shore up investor confidence in the $1.3 trillion municipal-bond market, which has been tarnished recently by influence-peddling scandals in New Jersey and New York.

Securities firms probably have been the single largest source of political funding for mayoral candidates in Denver in recent years. Since 1990, for instance, such firms have funneled at least $90,000 into Mayor Webb's campaign fund, city records show. And much of the money wasn't contributed until after Webb came into office.

"Quite obviously it's gotten out of hand," says Walter Imhoff, president of the Denver-based Hanifen, Imhoff investment bank. "It's gotten to be a fever and it's only going to get worse. So I'm glad to see it brought under control."

Imhoff's firm, which has given more than $4,000 to Webb, is one of ten underwriters recently picked to help the city refinance debt associated with Denver International Airport.

The city says the banks were chosen on their merits. But all ten, either themselves or through employees or employees' spouses and relatives, have given money to Webb's re-election fund, records show.

"Political contributions aren't the sole reason why a firm is selected in Denver," Imhoff says. But politicians, he concedes, "do have memories. To play, I do have to pay."

Cities issue bonds all the time to finance roads, schools, prisons, ball parks and other large capital projects. They hire investment banks to underwrite the bonds, which are sold to mutual funds, individuals and other investors. Underwriters can earn huge fees on large projects like DIA, since their compensation is usually based on a percentage of the debt floated. Pryor, McClendon & Counts, a New York-based investment bank, made more than $900,000 as the lead firm on a DIA bond issue a few years ago, according to a published report. The bank got the job after giving more than $20,000 to Webb's campaign. It also was named to the current refinancing team.

Under pay-to-play, any underwriter who wants a slice of a city's bond pie must--unofficially--first make campaign donations to the mayor and other elected officials in charge.

"Dealers feel they have to give [to politicians] for them to be even considered for underwriting positions," says Christopher Taylor, executive director of the Municipal Securities Rulemaking Board, which devised the new rule for approval by the SEC. "It had become an insidious practice which the board felt very strongly had to be addressed."

Imhoff says it didn't always used to be this way. Underwriting contracts were awarded based on merit alone, he says, not on the amount of money a firm raised for a political candidate.

In recent years, however, with the advent of larger bond issues and with the New York firms scrabbling aggressively for a larger share of the business, securities dealers have turned to campaign donations to keep themselves in the running, Imhoff says.

Patricia Schwartzberg, Denver's manager of revenue, says the recently named DIA underwriters were chosen from a group of 37 candidates. "It was merit-based," she says of the selection process. Almost all were members of the city's previous DIA team, picked in 1991, and were retained for the sake of continuity, she says.

In addition to Hanifen, Imhoff and Pryor, McClendon, members of the team include nationally prominent, New York-based banks like Goldman, Sachs and J. P. Morgan & Co., and smaller minority- and woman-owned firms like Apex Securities of Houston and Artemis Capital Group of San Francisco.

A few years ago, Apex gave Webb $2,000. Aimee Brown, a principal at Artemis Capital, gave Webb $1,000 last September. Morgan's Ronald Gault contributed $500 in 1992 (he worked for First Boston at the time). Goldman, Sachs and its employees began pouring money into Webb's campaign war chest three days after his election in June 1991 and have contributed close to $10,000 to date. Several firms that gave money--Kidder, Peabody; Prudential Securities; and Weldon, Sullivan, Hudson--were not selected for the DIA work. But no firm that did not contribute to Webb is on the list.

Schwartzberg says political support for the mayor "was not considered at all--and it never has been."

But that view's not shared by many of those in the investment-bank community. "You have to, in effect, buy the business with a contribution," says James M. Coughlin, president of the Denver-based Coughlin & Co. investment bank. Coughlin's firm has not supported Webb but has given money to city auditor Bob Crider, who is currently Webb's chief political rival. The bank submitted a bid to be a member of the current DIA team but was turned down.

"It's kind of made a mockery out of" the underwriter selection process, Coughlin says. "I think it's cheapened the politicians."

Two examples of alleged abuse have been widely cited by critics of pay-to-play in recent months. Last year in New Jersey, federal investigators began looking at a state bond-refinancing contract awarded to a company whose partner was an aide of the governor. And in New York a bank that had loaned $450,000 to the campaign of the comptroller later received an underwriting contract from the city.

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