Kicking Mud On Morgan's White Shoes

San Diego critics charge the bank with conflict of interest

That white-shoe paragon of Wall Street firms, J.P. Morgan & Co. has done it all when it comes to complex privatizations--such as a pending $1.5 billion nuclear fuel deal for the U.S. government. So when the investment bank spied a job shepherding the privatization of San Diego's $200 million landfill and trash transfer system, it saw an easy way to earn a little pocket change.

It hasn't worked out that way. Just months after signing on as San Diego County's financial adviser on the matter, Morgan finds itself mired in a morass of petty local infighting. And the mudslinging is getting uncomfortably close to Morgan's so-far-unsullied shoes. On June 25, a local bidder for the contract filed suit against San Diego, charging the county with violating state laws that protect against conflicts of interest. Critics say Morgan is double dipping: collecting a commission from the county while having financial ties to two of the three finalists--Allied Waste Industries in Scottsdale, Ariz., and USA Waste Services Inc. in Dallas. Final bids were submitted on June 24.

"VIOLATION." Morgan is not named as a defendant in the suit. But everyone from big-shot county politicos to the local press is charging that the county and Morgan are rushing a privatization scheme rigged in favor of big out-of-town bidders. "In my 20 years in public service, I've never seen such a violation of due process," says J. Michael McDade, chairman of the San Diego Unified Port District.

Trash, as Morgan is painfully learning, is a long-festering sore in San Diego politics. The county nearly went bankrupt in 1995, after blowing $139 million on an ill-conceived recycling plant. And the county and local cities have been engaged in endless litigation over everything from skyrocketing hauling fees to landscaping old trash dumps. Now, the county needs to move quickly to sell off the landfills to pay down debt incurred from the recycling plant.

Not so fast, says McDade, one of a small army of local lobbyists and lawyers who are rallying behind San Diego Regional Disposal, a unit of St. Joseph (Mo.)'s Herzog Contracting, which was eliminated from an initial round of bidding. Herzog has strong links to the county: It handled county landfill operations from 1982 to 1995 and built a popular trolley line.

BEWILDERED. In letters from Herzog lawyers to Morgan and the county, and now in the lawsuit, Herzog points out that Morgan is one of several lenders in a $1.6 billion credit line to USA Waste and has a 6.3% position in Allied Waste, making Morgan the largest holder of Allied's stock. "It's a blatant conflict of interest," complains Alan Landes, Herzog's Western regional manager. Herzog and its friends have even persuaded California Attorney General Daniel E. Lungren to investigate the bidding.

This has left Morgan officials in a bewildered state bordering on rage. "There's no conflict of interest under California law, and the bidding process has been consistently fair and open," says Michael George, a Morgan managing director. "If they think we are going to turn tail and run, they've got another thing coming." Privately, Morgan officials say they are astonished at how little some San Diego officials understand about how banking works. Morgan points out that it has no beneficial interest in the waste companies: Its piece of the loan to USA Waste is a mere $75 million, and the Allied Waste stock is simply held in trust in various asset-management funds.

Independent securities experts say Morgan's involvement does raise a few red flags, although that shouldn't result in a deal breaker. "All this certainly has the appearance of impropriety, but it won't taint the process," says Alan R. Bromberg, a professor of securities law at Southern Methodist University in Dallas. Morgan's George insists there is "no impropriety here." Still, the proud folks from the House of Morgan are learning the hard way that local San Diego politics and garbage can be a very messy combination.

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