In a move that has raised eyebrows across Minnesota's financial sector, state Attorney General Lori Swanson has dumped the venerable Dorsey & Whitney law firm as the state's chief bond counsel, saying that its ethical conflicts threatened to handcuff the state during Minnesota's budget shutdown.
The law firm, whose namesake Arthur Whitney reportedly boasted of having helped write the language that allowed the state to begin selling bonds in 1962, had served as the state's bond counsel for decades. Swanson gave the Minneapolis-based law firm a seven-day termination notice in July. Her office cited three instances in July where Dorsey & Whitney sought a conflict waiver because it was acting as bond counsel for a state agency and representing a client that had business before the same agency.
The move also is noteworthy in political terms: Swanson is a DFLer, and the 600-lawyer firm employs former Democratic U.S. Vice President Walter Mondale as a senior counsel. Former Attorney General Mike Hatch, a Swanson mentor, was once investigated and cleared for allegedly threatening to pull state business from Dorsey & Whitney because it had represented clients against Hatch's office.
But a spokesman for Dorsey & Whitney says the firm, which earned nearly $2.5 million in fees over the past four years, was never told why it had been dropped as the state's bond counsel.
"We have a long-standing client relationship," said Bryn Vaaler, the law firm's spokesman. "We have every reason to believe [the state has] been very happy with our work over the years."
Swanson declined to be interviewed, but her office released a detailed explanation of why she terminated Dorsey & Whitney as bond counsel for Minnesota Management and Budget, the state's main financial office, and for the Minnesota Housing Finance Agency.
Swanson's office said the move was driven in part by Dorsey's refusal to substantially reduce its hourly rates in light of the state's fiscal crisis. A Swanson spokesperson said Dorsey's top attorneys representing the state Housing Finance Agency charged $465 an hour and $423 an hour and offered to reduce their hourly rates by only $11 per hour.
"No vendor of the state should have a permanent monopoly on government projects," Swanson said in a statement issued through a spokesman.
Swanson has at least tentatively replaced the firm with Kutak Rock, an Omaha-based law firm specializing in bond counsel work.
In perhaps the most noteworthy episode, said Ben Wogsland, a Swanson spokesman, Dorsey & Whitney had a "serious and irreconcilable conflict of interest" that emerged in July because the law firm had represented the tobacco industry in the state's landmark 1998 lawsuit against Philip Morris and other tobacco companies.
When a plan emerged last legislative session to have the state sell the future stream of income from the tobacco lawsuit to ease deficits, Wogsland said, state officials sought alternate counsel, settling on Kutak Rock.
Wogsland said Swanson's office was forced to act quickly when the "tobacco bonds" proposal surfaced on July 14, the day of the budget agreement between Gov. Mark Dayton and Republican legislative leaders. He said Swanson hired Kutak Rock the next day, a Friday. The firm produced a 20-page "tobacco bond bill" by the end of the weekend, in time for the one-day special session.
Vaaler said that the issue was a "red herring" created by Swanson, and that the firm's lawyers "have not represented the tobacco industry in a major way for a decade or more."
The move has stunned many of those familiar with Dorsey & Whitney.
"They did some tremendous bond work for the state," said Peter Sausen, who served as Minnesota Management and Budget's main contact with the firm before retiring in 2007. "It never came to a point where I ever thought about suggesting to the attorney general's office that the bond counsel should be changed."
Bill Kuretsky, a retired assistant state attorney general, said he served as the office's main contact with Dorsey & Whitney before leaving in 2010. "I never had any issues with Dorsey," he said.
Kuretsky, who had worked with the state's bond counsel since the mid-1990s, said he was aware of general discussions over the years about whether to replace Dorsey & Whitney but said he was not involved in them.
"I know that not just Lori [Swanson] but other attorney generals have had questions about having the same firm continuously doing the same work," he said. The issue, Kuretsky added, boiled down to "whether the benefits of them having the background offset the question of whether or not you're getting the best deal for your money."
Kuretsky recalled episodes when, while researching a legal point, Dorsey & Whitney attorneys would announce "we just pulled up a letter from 1981" that addressed the issue. "Now you got somebody in there that's got to go back and relearn all of that other stuff," he said.
In 2005, while attorney general, Hatch had his own conflict with the firm when he was suing Medica Health Plans. Medica was represented by Dorsey & Whitney. When Dorsey refused a Hatch request to move the site of a legal deposition, Hatch reminded the firm that he had waived a rule prohibiting the state's bond counsel from opposing the state in lawsuits. A Dorsey attorney said Hatch told him there were other firms that could serve as the state's bond counsel.
After Republicans filed a complaint, the legislative auditor investigated the matter and later cleared Hatch, a DFLer, of any wrongdoing. Hatch did not respond to interview requests for this story.
Swanson's office "must have a good reason" to make the change, said Tom Hanson, the state's chief financial officer under former Republican Gov. Tim Pawlenty. Dorsey & Whitney, he said, "did a very good job, [we] never had any trouble."
Mike Kaszuba • 651-222-1673