Jan. 7 (Bloomberg) -- Federal prosecutors are asking if New Mexico Governor Bill Richardson’s former chief of staff told a state agency to hire a bond adviser that donated $100,000 to Richardson’s political committees, people familiar with the matter said.

A witness who testified before a federal grand jury in Albuquerque last month said he was asked if David Contarino, the former chief of staff, ordered New Mexico Finance Authority officials to hire Beverly Hills, California-based CDR Financial Products Inc. Another person familiar with the investigation said Contarino, 47, is a subject of the inquiry and that prosecutors are looking at whether he solicited contributions from firms that worked on finance authority bond deals.

Prosecutors are also asking about a trip that Contarino and former finance authority chief executive David Harris took to Los Angeles in May 2004 after a state bond sale. They met with CDR officials, attended a Los Angeles Lakers basketball game and eat dinner at the Palm restaurant, people said.

“The governor is fully supportive of Dave Contarino and is confident that he always acted ethically and appropriately during his time as chief of staff,” said Gilbert Gallegos, a Richardson spokesman in a e-mailed statement. “Dave was a key part of the progress in New Mexico under Governor Richardson’s leadership.”

Richardson Withdrawal

Richardson withdrew from consideration as President-elect Barack Obama’s commerce secretary on Jan. 4, citing a pending investigation of a bond advisory company. CDR contributed to Richardson’s efforts to register Hispanic and American Indian voters and pay for expenses at the 2004 Democratic National Convention, according to campaign finance records.

The firm earned about $1.5 million for advising the state’s finance authority on interest-rate swaps and restructuring escrow funds for $1.6 billion of transportation debt as part of Governor Richardson’s Investment Partnership, known as the GRIP program, agency records show.

“As chief of staff and co-chairman of the Governor’s Finance Council, it was my job to be involved in GRIP and many of the administration’s economic and financial initiatives,” Contarino said in an e-mail statement. “In all of my actions, I acted appropriately and I am confident that the investigation will bear out that fact.”

‘Exceptionally Able’

CDR President Rubin, in a statement Jan. 5, called Richardson “an exceptionally able and dedicated public official who was highly deserving of the opportunity to hold a cabinet- level position in the new Obama administration.”

Rubin said his company underwent “a rigorous vetting process” and “has never practiced pay-for-play on any playing field where we do business.”

CDR spokesman Allan Ripp said CDR didn’t pay for Contarino and Harris to fly to Los Angeles. The firm believes it paid for the basketball tickets though couldn’t recall who paid for dinner, Ripp said.

“There was no corporate jet; they weren’t flown out on CDR’s dime. They came out to Los Angeles on their own,” Ripp said.

“CDR checked with their tax counsel at the time, Fulbright & Jaworski, specifically asking if they could have dinner with them and go out with them and the counsel’s opinion was, under New Mexico law, the answer is yes.”

Douglas Goldberg, a former CDR employee now at Deutsche Bank AG, and Evan Zarefsky, who still works at CDR attended the game and dinner, Ripp said.

Los Angeles Trip

Contarino and Harris’ lawyer, Paul Kennedy, didn’t immediately return a call seeking comment on the Los Angeles trip.

Contarino, a Cornell University graduate, managed Richardson’s 2008 presidential effort, ran the governor’s first gubernatorial campaign and served as his chief of staff from 2003 through 2006.

“He’s the guy who makes the train run on time,” said Joe Velasquez, who ran Richardson’s Moving America Forward political organization in 2003 and was a political adviser on Richardson’s national campaign.

No One Charged

No one has been charged with wrongdoing as a result of the grand jury’s review, reported by Bloomberg News on Dec. 15. The people familiar with the hearings declined to comment, citing grand jury secrecy rules.

Greg Fouratt, the U.S. Attorney in Albuquerque declined to comment. David Harris, the New Mexico Finance Authority chief executive officer when CDR was awarded the contract in March 2004, couldn’t be reached for comment. He worked as the agency’s head for a year beginning in May 2003. His attorney, Kennedy, declined to comment.

Bill Sisneros, who became CEO of the finance authority three months after CDR was selected, said Contarino never told him to choose CDR for other work.

“Dave and I, we’ve talked about CDR but he never ordered me to do anything with CDR,” Sisneros said. “I’ve never spoken to Bill Richardson about CDR.”

Michael Stratton, a senior political adviser to Richardson, lobbied the authority on CDR’s behalf, Sisneros said.

“He was a hired hand for them,” Sisneros said. “His office would set up meetings with CDR when they’d come into town.”

Consultant Payment

CDR spokesman Ripp confirmed that Stratton worked as a consultant to the firm.

Stratton was also paid $269,000 by JPMorgan Chase & Co. in 2003 and 2004 to help win public finance business in New Mexico, according to Municipal Securities Rulemaking Board records. JPMorgan served as lead underwriter on about $1 billion of transportation bond deals for Richardson’s transportation program.

Stratton has declined to comment on the New Mexico investigation. The adviser was also a so-called bundler for Richardson’s presidential bid, according to Public Citizen, a nonprofit consumer advocate. Bundling describes the actions of fundraisers who pool campaign contributions from political action committees and individuals, according to Public Citizen.

In 2004 CDR President David Rubin donated $4,000 to the U.S. Senate campaign of Ken Salazar of Colorado, whose election effort was chaired by Stratton. Salazar has since been nominated by Obama to be Secretary of the U.S. Department of the Interior.

Grand Jury

“The deal handled by the New Mexico Finance Authority with CDR was thoroughly scrutinized through a rigorous procurement process,” Richardson told reporters in Santa Fe Jan. 5. “I have always fully expected that my administration would be cleared of any wrongdoing and it would be clear that nothing improper took place.”

Richardson said he withdrew from consideration as a cabinet member because the probe threatened to postpone his confirmation by the Senate to a key economic policy position at a time when Obama seeks quick approval of legislation to lift the U.S. out of a recession. He has hired an Albuquerque criminal defense attorney, the Associated Press reported.

CDR advised the finance authority on the purchase of interest-rate swaps from New York-based Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., JPMorgan, UBS AG of Zurich and Royal Bank of Canada in Toronto.

Interest-Rate Swaps

Interest-rate swaps are derivatives, or contracts whose value is derived from assets including stocks, bonds, currencies and commodities, or from events such as changes in interest rates or the weather. Borrowers use them to lower costs and reduce their exposure to swings in interest rates.

CDR was hired after responding to a Dec. 30, 2003, request for proposals from the finance authority for investment advisory services.

Six companies answered the request, which contained two questions out of 39 items related to experience with interest- rate swaps and guaranteed investment contracts. A joint venture of the New York companies Salomon Smith Barney Inc., a unit of Citigroup Inc., and Ryan Labs Inc. received the top score of 99 percent. CDR had the second-highest score of 97 percent, authority records show.

Rather than select the Smith Barney/Ryan Labs team as both investment and swap adviser, the authority’s then-Chief Financial Officer, Keith Mellor, recommended splitting the job. The agency gave the swap adviser assignment to CDR, which received the same score as the Smith Barney/Ryan Labs team on the swap section of the proposals, authority records show.

CDR Selection

The chair of the committee that recommended CDR’s selection, Rick Homans, has declined to comment. At the time, Homans was the Secretary of New Mexico’s Economic Development Department. He now serves as the secretary of the Taxation and Revenue Department.

In a March 10, 2004, memo to the finance authority’s board, Mellor said the agency chose CDR as swap adviser because it specialized in assisting state and local governments, including the University of New Mexico, with derivatives. The authority’s board approved the selections at its meeting later that month.

To contact the reporters on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net; William Selway in San Francisco at wselway@bloomberg.net.

Last Updated: January 7, 2009 16:09 EST