But Robert Lamb, a professor of finance at New York University, says it's not the work but the risk that is the driving force behind the high cost of bond legal work. An attorney's mistake in an official statement, Lamb says, can give investors grounds to sue in the event of a bond default. "The payment to the lawyers is not simply for work performed and hours billed, but is in effect a risk premium," Lamb says.
Lamb and many bond attorneys cite the disastrous bond default of the Washington Public Power Supply System in the 1980s as an example of how things can backfire when lawyers make mistakes. In that case, Lamb says, "gross" negligence by disclosure lawyers helped contribute to massive losses to investors, who had purchased more than $2 billion worth of bonds issued to build a series of nuclear power plants in Washington state. When WPPSS defaulted, investors sued the law firms, at least one of which went up in smoke.
"It's a little bit like the risk of AIDS," William Appel, a Seattle-based former bond attorney, says of investor suits. "If you get hit, it's fatal."
That may be about to change, however. A few weeks ago a ruling by the U.S. Supreme Court severely limited the right of investors to sue lawyers, accountants and others accused of "aiding and abetting" others in bond default cases. The opinion stemmed from a Colorado suit against Central Bank of Denver, a trustee for a series of public improvement bonds issued in conjunction with a failed Colorado Springs real estate development. The plaintiff in the case argued the bank had failed to obtain a proper appraisal of the land used to secure the debt, thereby allowing the default to occur. The court sided with the bank.
Presumably, says NYU's Lamb, the Supreme Court decision means that the risk law firms face in securities work has gone down--and that therefore, the fees they charge should also drop. "That risk premium should be diminished or drastically reduced," he says.
But don't count on it, says Tucker Trautman, a Denver lawyer who represented Central Bank in the Supreme Court case. Investors can still sue bond attorneys who do work in Colorado under state law, he says, so the risk undertaken by firms doing work for DIA and other in-state projects hasn't disappeared.
Wayne Marr doesn't think the Supreme Court case will make a difference in bond costs. The fundamental problem, he says, isn't risk but the cavalier attitude city governments often have when dealing with public funds. Law firms get away with charging so much, he says, because the politicians who hire them aren't spending their own money. The public, meanwhile, pays little attention.
Most voters don't care about municipal finance," says Marr. Waste has been a fact of life in public finance since the 1700s, Marr adds, and he doesn't see reform coming anytime soon. "Until there's an incentive to do something about it," he says, "it will never change.
