... A small California school district said its financial advisor "duped" it into overpaying hundreds of thousands of dollars for services in a lawsuit that is playing out amid controversy in the state over school bond election and borrowing practices.
Advisory firm Caldwell Flores Winters, Inc. sued Willits Unified School District for breach of contract, resulting in a counter-complaint from the Mendocino County district with 1,800 students
Critics say the legal dispute has uncovered questionable, if not illegal, practices. ... ... The advisory firm convinced district officials to seek a bond authorization well beyond what the district would legally be able to issue because the larger figure would generate more fees for Caldwell Flores Winters, the district argues in its lawsuit.
CFW was hired in 2009 to advise the school district on the bond program that led to the issuance of four series of bonds totaling $18.87 million in July 2010, which will cost $38.6 million in debt service. The sale included $3.78 million of capital appreciation bonds that will cost $21.9 million at maturity, the official statement said. ... ... This, Willits Unified argues, represented a conflict of interest because CFW influenced a decision that directly affected its compensation, which is generally banned by state law. The contract also represented a breach of fiduciary duty.
The district's complaint said CFW initially assumed a $29 tax rate per $100,000 of assessed valuation in the district, which would have supported $23 million of bonding. Even though it was aware that assessed values had dropped in the district after the election, CFW charged Willits a 2.5% fee for the $43 million capital program it advised the district to adopt even though only $18 million was available to fund school construction, according to the cross-complaint.
That fee - $1.075 million
- was due in 36 monthly installments after the bond election passed. CFW sued after Willits cancelled the contract, seeking six months of payments plus a $108,993 cancellation fee for a total of $278,961, according to CFW's complaint. ...
... California Treasurer Bill Lockyer's
office said he is troubled because CFW had a financial interest in recommending the highest bond authorization.
"If that doesn't violate conflict of interest laws, it should," said Tom Dresslar, Lockyer's spokesman. "This is the kind of stuff that is giving school bond finance a bad name." - Lockyer has been trying to limit schools' ability to issue capital appreciation bonds, arguing that they cost taxpayers too much for too long. - According to the treasurer, from 2007 to November 2012, CFW made far more money from California school bond sales that included capital appreciation bonds than any other financial advisor firm. ...
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