Philadelphia lawyer offers Lewisburg help

Friday, April 17, 2009

Lewisburg will be refinancing its troubled sewer bonds soon, and while some city leaders are concerned they may face additional fees for allegedly breaking a contract, there's a Philadelphia lawyer offering to sue the company that insured the bonds for the city.

Fees could be: as high as $900,000 according to a financier's reading of the contract; $564,000, according to a new legal advisor for the city, or; zero, according to the Philadelphia lawyer who, given his offer to city leaders, might be able to extract a court award for the city.

That's according to Kenneth Carr, superintendent of the Lewisburg Water and Wastewater Department. He's among the town's top leaders wrestling with a sewer bond deal that's gone awry. Their concern is a fee mentioned in a bond sale insurance contract.

The fee is because of American Municipal Bond Assurance Corporation. It insured city utility bonds to increase their security so interest rates on the loan would be lower, but AMBAC was downgraded by an investors' service, so the city's debt increased.

That's one of the points in a New York Times story published on April 7 and the subject of a chain of events reported here as early as Feb. 13. It's a tale of Wall Street woes over sub-prime mortgages and the recession that has chickens going home to roost on Main Street and town halls across America.

Lewisburg's contract with AMBAC triggered state and federal regulations requiring an accelerated repayment schedule - a payoff period of seven years instead of 17 - plus a higher interest rate and the penalty fee. It's as if a homeowner's mortgage insurance failed and monthly mortgage payments doubled and the 25 years left on a 30-year home loan became a debt that had to be repaid in a decade.

Unhappy about that situation, Lewisburg's City Council voted on Feb. 24 to hire another investment counselor who's not selling bond deals so the debt could be refinanced with two other utility projects.

However, that's not the end of it.

"I'm still fearful they will send us a bill for termination" of the contract, Mayor Bob Phillips said last week while reflecting on the New York Times story that's been circulated among leaders and residents of Lewisburg.

The contract was an addition to the sewer bond sale. It created what financiers call a "synthetic fixed rate" for half the bonds' original value. When sold, the bonds had a very low rate, but the cost of the money came with a variable rate. Since that could increase city costs, leaders sought stability for the debt. The "synthetic fixed rate" was floating with a monthly rate established by the London InterBank Offered Rate. LIBOR's calculations on rates were good for the utility's repayment of debt, but not anymore because of changes in the money market.

The fee to "unwind" the so-called "swap" part of the altered debt "is based on the difference between the fixed rate and the variable interest rate," Carr explained Tuesday night when speaking about the financial deal that the city is leaving for a bond sale. City Treasurer Connie Edde said Wednesday the sale is proposed for May 1.

"It may take a few days to get them all sold," Edde said.

In the midst of such concerns, Gov. Phil Bredesen has become aware of the trouble for towns like Lewisburg, Manchester and Mt. Juliet, and Claiborn County near Knoxville, among other communities that had bonds insured by AMBAC.

Bredesen told WPLN FM radio news that the state wouldn't be able to help such communities in trouble like that.

"We weren't asking for that," Mayor Phillips said, adding that he hopes "wide" publicity will "protect" Lewisburg from additional money woes caused by complicated contracts that backfired when Wall Street money dealers didn't have the collateral to backup contracts to insure bond sales.

That publicity attracted the attention of Mark B. Schwartz Esq. of Byrn Mawr, Pa., an affluent town just northwest of Philadelphia.

"A Philadelphia lawyer called and said, 'Don't pay them a dime" in unwind fees, Carr said Tuesday night. "'I'll take it on a contingency fee for the damages.'"

In other words, the attorney would represent Lewisburg in a lawsuit he'd file to recover losses suffered by Lewisburg because of any increased costs associated with the sewer bond deal. The so-called Philadelphia lawyer wouldn't charge the city for the job. He'd collect a significant percentage of whatever a court might award if he won. If he lost, the city wouldn't owe him anything.

Schwartz called Phillips at his H&S No. 2 Pharmacy on the ByPass and then spoke with the city treasurer. He and Edde also exchanged e-mails.

"He was interested in eliminating the unwind fees and seeking damages," Edde said. "AMBAC is who we have the contract with and ... the unwind fees."

Schwartz e-mailed Edde noting the Times' story "about the tragedy that has befallen Lewisburg," explaining "I am a frequent critic of the municipal finance industry, having been an investment banker who whistleblew against Prudential Securities."

In 1993, the Times reported widespread fraud at the securities firm that started out selling burial insurance decades earlier. Much of the fraud stemmed from the firm's misrepresentation to investors of the safety and returns of limited partnerships sold in the 1980's.

"As a result of my background in law and public finance, my comments have been sought in a host of publications and television," Schwartz told Edde. "I also maintain a law practice with a number of high visibility cases...

"Simply stated, I am interested in representing Lewisburg against the various SWAP participants," Schwartz said referring to one of the more complicated parts of the bond deals."

Morgan Keegan & Co., Knoxville served as Lewisburg's financial advisor for the bond sale, conducted a class on how the deal would work, and participated in the sale of the bonds, a practice described by the Times.

"Not only is Lewisburg directly financially harmed by what I consider to be a clear conflict of interest," Schwartz said, "but its rating will be hurt with attendant increased costs for future borrowings.

"I believe that I can obtain the proper redress for you," Schwartz said.

Clearly, his proposal goes beyond elimination of the so-call unwind fees associated with the city's withdrawal from the bond deal organized by Morgan Keegan.

"The city will definitely be asked to pay the unwind fees," the city treasurer said. "I don't know" if the city will pay, Edde said.

As for the Schwartz proposal, she said, "We'll research him before he's taken on a contingency fee basis... We haven't discussed the terms."

While, ultimately, city property taxpayers might be the source of money to pay fees if they must be paid, state law requires utilities to be self-sufficient. That means, Carr said, water and sewer rates would have to increase if the fees aren't waived, or if any litigation such as Schwartz proposes is unsuccessful.