Last week's decision by the New York rating company Standard & Poor's to downgrade Denver International Airport bonds to "junk" status was bad news pretty much all the way around. Mayor Wellington Webb, already reeling from a steady fusillade of embarrassing headlines, suffered yet another blow to his reputation as a manager. The mutual funds, insurance companies and others who've bought the bonds over the last few years saw the value of their investments tumble downward. The airlines and travelers who will use DIA faced the prospect of higher interest rates on any new bonds issued to pay for the airport--an increase in costs that ultimately would be passed on to them.

One group, however, had no real cause for alarm: the elite clique of lawyers who do DIA bond work. In fact, the attorneys had reason to celebrate. Despite S&P's decision, Denver Revenue Manager Patricia Schwartzberg said the city intends to forge ahead with plans to refinance millions of dollars' worth of airport bonds this summer. The lawyers slated to work on the reissue stand to reap tens, perhaps hundreds, of thousands of dollars in new fees.

Though a pittance compared with the billions spent on the new airport, the legal costs of DIA bond issues over the last four years have already reached staggering heights. Six different law firms--at any one time--have been engaged on most of the thirteen new issues and remarketings of DIA bonds since May 1990. The legal bill thus far: well over $4 million.

No taxpayer money has been used to pay the firms; their fees come entirely out of the bond debt itself. But some critics argue that, no matter what the source, bond fees for large-scale projects like DIA tend to be much higher than they need to be. The attorneys hired to churn out legal documents on bond issues "don't do anything," says Wayne Marr, a finance professor at South Carolina's Clemson University. "[Their work] is basically legal window-dressing."

The situation in Denver is further complicated by the fact that all six firms currently doing DIA bond work have contributed money to Webb's election fund--and that three enjoy especially close political ties to the mayor. Partners in two of the firms have had serious legal troubles--one for misusing trust-fund money, the other for nonpayment of taxes and the use of marijuana and cocaine.

Airport bond work is "a gravy train for the mayor's buddies," says Michael Boyd, a Golden airport consultant and a virulent DIA critic. But attorneys who work in the field insist that bond work is difficult and painstaking--and worth every penny. They say firms take huge risks every time they take on a municipal securities job, since mistakes can lead to crippling lawsuits by investors. Reducing the firm's risk requires hundreds of hours of meticulous work and fact-checking, as well as the payment of huge malpractice premiums. That can drive legal fees sky high.

"The risk of potential liability is enormous in this kind of work," says Andrew Kintzinger, a Minneapolis attorney and president-elect of the National Association of Bond Lawyers. "Any law firm engaged in the offer and sale of securities pays significantly more in malpractice insurance premiums."
John Yeoman, a professor of finance at North Georgia College, agrees. The "vast majority" of the fees bond lawyers charge, Yeoman says, go toward protecting themselves against lawsuits that may be filed if an issue goes awry. "They're putting their houses on the line," he adds.

But Clemson's Wayne Marr, a former senior economist with the federal Securities and Exchange Commission, is unmoved by these arguments. "It's easy work," he maintains, "if you can get it."

American cities float bonds all the time to pay for baseball parks, road viaducts, sewers and other large capital improvement projects. The cities hire investment banks to underwrite the bonds; the banks in turn sell the bonds to investors, who are repaid with interest, usually over thirty years. The process makes good sense: Bond debt gives local governments a way to fund projects that would be unaffordable using cash on hand.

But it's very expensive. Every time bonds are floated, cities are required to pay out tens of thousands of dollars in "issuance costs"--the fees and commissions for professionals who put together and manage the deal. Each investment bank involved gets a cut. Financial advisors get hired at top rates. And, of course, there are law firms galore.

DIA has been no exception. When the first $700 million in construction bonds were issued in May 1990, issuance costs ran to $7.4 million, more than 1 percent of the total. A phalanx of fifteen investment banks collected $6.1 million in fees and commissions. Financial advisor Smith Barney Harris & Upham got $300,000. The law firms: almost $950,000.

And though just three types of lawyers are required for each airport issue--"bond counsel," "disclosure counsel" and "underwriters' counsel"-- Denver has almost always divvied up the work further to guarantee that local firms get a piece of the pie. The city's "tag-team" approach pairs large, nationally recognized firms with small but politically connected local ones. Thus Hogan & Hartson of Washington, D.C., with 400 lawyers worldwide, has joined with Denver's miniscule Trimble & Nulan; Chicago's Hopkins & Sutter with Denver's Becker, Stowe, Bowles & Lynch; and Philadelphia's Ballard, Spahr, Andrews & Ingersoll with the 18th Street firm of Bookhardt & O'Toole. All the firms, whose attorneys charge anywhere between $95 and $320 an hour, have been hired under no-bid "professional service" contracts, which don't require approval by the Denver City Council.

The current legal team will remain in place for any refinancing or new issues that take place later in the year. Says Lee Marable, the assistant city attorney in charge of airport legal work, "We feel they're the best qualified to do the job."

Boyd, the Golden aviation consultant, says the arrangement smacks of old-style spoilsmanship. He notes, however, that Denver's setup is typical of other cities and states around the country. "In all fairness to the mayor, this probably isn't uncommon," Boyd says. "But that doesn't make it right."

Webb has always scoffed at the notion that politics figure in the awarding of professional service contracts. Selection of outside firms, he has said, is based on merit alone.

But records show that airport bond work has been an extremely lucrative source of cash for lawyers with Webb ties.

Take Linwood Tyrone Holt. A longtime friend of Webb's, Holt served as the mayor's personal attorney and advisor during Webb's term as city auditor. He was a director of the Webb Fund, a controversial private account Webb used to pay political expenses while running for mayor in 1991. And he later chaired what was billed as the "cronyism-free" search committee that helped Webb select Dan Muse for the job of city attorney.

Shortly after the election, Holt's law firm, Holt & Associates, was hired as DIA underwriters' counsel alongside Ballard, Spahr, which had been doing the job alone since May 1990. In the following nine months, records show the firm worked on three new bond issues and one bond remarketing.

Webb told reporters in September 1991 that political considerations weren't a factor in the decision to hire Holt's firm. "These people are qualified and competent," the mayor said.

Less than a year later, however, Holt was suspended from the practice of law by the Colorado Supreme Court after he admitted that he failed to file state and federal income tax returns for eight consecutive years in the 1980s. Holt also admitted that he had regularly used marijuana and cocaine. Some of Holt's offenses, the court noted, were felonies under state and federal law.

Webb put a quick end to the city's dealings with Holt when the suspension became public. "I am distressed to learn of Tyrone's professional setback and personal difficulties," the mayor said the day after the court's ruling. "My priority at this time is to protect the interests of Denver taxpayers and investors."

But Holt's financial problems would have been obvious to anyone who'd done a little checking. In fact, Holt and his law firm were already in Chapter 11 bankruptcy when they were selected for DIA bond work--and had been for nearly a year.

At the time of the bankruptcy filing in October 1990, Holt's largest creditor was the Internal Revenue Service. According to Holt's own attorneys, he and his firm owed the government well over $300,000. (Later, the IRS placed Holt's actual tax debt at $1.2 million.) Indeed, it was the IRS that drove Holt into bankruptcy when it began seizing his assets, court records show.

And it wasn't the first time nonpayment of taxes had gotten Holt into trouble. IRS debts had helped force Holt & Associates to seek bankruptcy protection in 1985 as well, according to federal court records. At that time, the firm owed the federal government more than $45,000 in back taxes, penalties and interest.

City councilman Ted Hackworth says that when the city was hiring attorneys to do DIA work, he and other councilmembers assumed the administration had done background checks on the firms. "I'm just shocked that [the city] didn't do the appropriate investigation," Hackworth adds.

And though the city fired Holt after his suspension, a spinoff of his old firm has picked up where he left off, continuing to work as underwriters' counsel on DIA bonds.

Just three weeks before his suspension from the bar in 1992, Holt formed Bookhardt, O'Toole & Holt with two young associates from his old firm, Dawn Bookhardt and Kevin J. O'Toole. Records show Holt held an 80 percent stake in the new partnership. Bookhardt and O'Toole each owned 10 percent.

Today the firm does business simply as Bookhardt & O'Toole. Records show that it has received more than $40,000 in Denver airport legal work in 1993 and 1994; recently the firm won a contract extension that could earn its partners up to $50,000 in additional city business through the end of this year.

Holt, whose law license was reinstated in April, insists that Bookhardt & O'Toole is a completely different entity than Bookhardt, O'Toole & Holt. "I was never a principal at Bookhardt & O'Toole," Holt says. "Neither I nor any firm that I had ever had any ownership interest in that firm--ever." Dawn Bookhardt and Kevin O'Toole did not return repeated phone calls.

Holt isn't the only politically connected lawyer to win airport bond work despite a troubled past.

Two years ago Denver attorney Darrell Nulan was suspended from the practice of law for sixty days for improperly diverting thousands of dollars from a trust fund to himself and members of his family. Nulan repaid the money, but the Colorado Supreme Court ruled that his conduct "involved dishonesty and misrepresentation" and was a "serious violation of a lawyer's responsibility to the public" ("Not Only Angels Have Wings," April 6).

Nevertheless, Nulan's firm, Trimble & Nulan, has continued to work as a member of the DIA bond legal team. The three-man firm, which specializes in public finance, was named co-bond counsel for the city when Federico Pena was mayor and remained on after Webb took office. Nulan's suspension occurred after Webb's election, but had no apparent effect on the firm's standing with the city. Since Nulan's censure, Trimble & Nulan's bills for DIA bond work have topped $490,000.

Nulan's partner, King Trimble, is a longtime Webb ally. Trimble, Nulan and members of their families have given more than $5,000 to Webb's election fund in the last three years, records show.

Nulan says his problems in the past shouldn't preclude him and his partners from representing the city. "I don't think I ought to be punished forever," he says.

The city's Marable says he has no comment on Holt, because the decision to hire him "was made before my time." But he makes no apologies for retaining Trimble & Nulan. The firm, he says, has "a very good reputation" and is among "the best people available" for the DIA bond team.

One local attorney who does DIA bond work has acknowledged that political connections might help a law firm seeking a Denver professional services contract. Erick Stowe of Becker, Stowe, Bowles & Lynch, who raised money for Webb's 1991 campaign, told U.S. News & World Report last year that his support may have "played a role" in the firm's selection as disclosure counsel on airport bonds.

Back when Pena was in office, the two firms selected to serve as DIA disclosure counsel were Hopkins & Sutter and Denver's Brownstein, Hyatt, Farber & Madden, itself known for aggressively courting Pena and other politicians. After Webb's election, the city dumped Brownstein, Hyatt and brought in Becker, Stowe; since being hired by the city, the firm has earned more than $500,000 in DIA fees.

Webb told U.S. News that the idea Becker, Stowe was hired for political reasons was "ridiculous. The people are selected based on their qualifications to do the job." When contacted by Westword, Stowe declined to comment.

At first glance, the official statement for Denver's series 1992B airport revenue bonds looks like dull reading indeed. Issued in May 1992 along with $315 million in new airport debt, the 64-page document was the chief work product provided on the deal by DIA disclosure counsels Hopkins & Sutter and Becker, Stowe. It is filled with page after page of mind-numbing boilerplate describing the bond issue's terms and conditions, redemption schedules, airport construction progress and other "material" matters.

Most of the statement, however, is a near carbon copy of an official statement put out by the same firms on another airport bond issue only three months earlier. Paragraphs, sections, even entire pages have been reprinted with only minor changes from the Series 1992A statement, issued the previous February. Much of the 1992A statement, furthermore, is taken verbatim from the Series 1991D statement issued in October 1991.

The cost of the statements is striking. Disclosure counsel charges to the city on the 92B issue came to $116,800, records show. For the 92A statement, the charges amounted to almost $275,000. And the 91D statement cost the city $213,000, bringing total disclosure charges for the eight-month period to more than $600,000.

A review of the law firms' invoices to the city shows why. Attorneys from Becker, Stowe alone spent close to 200 hours working on the 1992B bond issue between March 15 and May 20 of that year. They attended meetings, composed memos and statement drafts, and talked to other lawyers on the phone. On April 14, 1992, Stowe's wife and law partner, Georgeann Becker, spent sixteen hours preparing for and attending various meetings, then revising a draft of the official statement. The bill for her time on that day alone: $3,600.

Official statements are required by law: They're designed to alert investors to all relevant facts that may affect the value of bonds. But Wayne Marr charges that statement costs are often vastly inflated, particularly on a large project like DIA where bonds and new statements are regurgitated every few months. "A lot of it is just make-work," Marr says.

While serving as a senior economist with the SEC in the 1980s, Marr helped develop a debt-financing technique called "shelf registration," designed to reduce the amount paid for official statements and other issuance costs. While the private sector has widely adopted the practice to save money, cities around the country have ignored it, Marr says. "The problem is simple," he says. "The muni bond market is the most corrupt market in the United States."

Hopkins & Sutter and Becker, Stowe decline to comment on their work for the city. Other bond professionals, though, say official statements that look like virtual duplicates of earlier ones may nonetheless involve hundreds of hours of work. Even statements issued just days apart, they say, need to be reviewed carefully to make sure that changes in the project are noted and that case law and relevant state and federal statutes are followed to the letter. "These are not off the Xerox machine," says Alex Brown of Denver's George K. Baum & Co. investment bank. "Every one is from scratch."

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.


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