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California’s Lockyer Seeks Probe of Muni-Bond Conduit

Aug. 24 (Bloomberg) -- California Treasurer Bill Lockyer called on Attorney General Kamala Harris to investigate whether conflict-of-interest laws were broken at one of the state’s biggest issuers of municipal debt, a conduit for bond sales on behalf of local governments.

Lockyer’s request follows a report by the state auditor that questioned the California Statewide Communities Development Authority’s use of consultants that do the work of public officials in return for a percentage of the debt issued. California law prohibits public officials from making, participating in, or influencing decisions that affect them financially.

“Although we found that the compensation model of the joint powers authorities raises concerns, we cannot conclude that it violates California’s conflict-of-interest laws,” according to the report.

The authority, which employs HB Capital Resources Ltd. of Walnut Creek for management services under a no-bid contract, has paid its consultants about $50 million from July 2006 through June 2011, the auditor said. The authority has sold more than $48 billion of securities since it was set up.

“The problems identified in the auditor’s report are sufficiently serious and substantial to warrant an investigation by the attorney general to determine if conflict of interest laws have been violated,” Lockyer said yesterday in a statement.

The management arrangement gives HB Capital a financial interest in persuading local officials to approve bond sales by the authority, Lockyer said. The Joint Legislative Audit Committee ordered the study a year ago at Lockyer’s urging.

Hijacked Agency

The treasurer voiced concern at the time that the joint-powers law that provides the bonding agency’s legal foundation had been hijacked to produce gains for nongovernment firms.

“We’re pleased, but not surprised, that the auditor found California Communities’ business practices to be in full compliance with the law,” Larry Combs, the authority’s chairman, said in a statement that also represented HB Capital’s response. “We’re very proud of California Communities’ positive 24-year track record.”

The audit report called for better transparency regarding how the authority’s management company compensates its own employees and for periodically seeking bids for the contract held by HB Capital. It also called on the Legislature to enact an exemption to the conflict-of-interest law for the firm and others that do similar work for conduit agencies.

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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