Deputy Mayor Alphonse G. Hill said yesterday that the District has been "sensitized" to the risk of investing in small government securities firms, following the bankruptcy of a New Jersey-based firm with which the city did business, and will be inclined to use only primary dealers from now on.
This week the city fully recovered the$10 million that it had invested recently with Bevill, Bresler & Schulman Inc., plus $135,374 in interest, by seizing and selling collateral that had been posted by the firm.
But the District's brush with the failed BB&S and related firms has led the administration to reassess its short-term investment policies, according to Hill. And City Council Chairman David A. Clarke and council member John A. Wilson (D-Ward 2) called for hearings or an investigation into the matter.
"It may well be that in this one purchase the city was safe because of the collateral, but I do think there needs to be an examination of the entire cash management process," Clarke said yesterday.
Wilson, chairman of the Finance and Revenue Committee, said that he will hold an "investigative hearing" May 6 into the city's practices of investing its cash.
"There are many unanswered questions about the city's investment polices," he said. "I am deeply troubled that the District would go ahead and invest in a shaky securities company, especially since the administraton was warned about the risk of such an investment."
Hill added BB&S Inc. to the city's list of approved investment firms in early December despite objections from Alvin C. Frost, the city's senior cash management analyst, who protested to one of his supervisors that the firm was "thinly capitalized" and risky to deal with.
Hill said yesterday that while he accepts responsibility for selecting BB&S, he had taken a careful look at the firm's financial statements and interviewed company officials before deciding to do business with the firm.
He said that not until this week was he shown a Dec. 14, 1984, memorandum that Frost had written to Fred Williams, the assistant D.C. treasurer, outlining his concerns and complaining of being pressured by Hill and Williams to do business with BB&S.
"Williams said he had it in his files," Hill said, adding that he is not certain why Williams held back the memorandum. "Maybe it was a question of whether he respected Alvin's judgment."
Neither Williams nor Frost could be reached for comment.
Hill denied that he had at any time tried to pressure Frost to invest with BB&S, once the firm had been added to the list.
"A lot of this is hindsight," Hill said. " . . . I don't care if you're dealing with the biggest bank in the the world, if someone is going to permit a fraud, it's hard to leverage against it. Yes, there are precautions I guess one could say the city could have taken, but we didn't have any problems with BB&S until all of a sudden."
BB&S Inc. is part of a group of five related securities companies placed in receivership this week that now face federal Securities and Exchange Commission charges of fraud.
The District had invested with BB&S Inc. at least five times prior to its April 2 transaction, according to a D.C. government source. Under the April 2 agreement, the city technically loaned $10 million in cash to the firm for two weeks at an interest rate of 8.8 percent after the firm had posted U.S. Treasury notes as collateral, according to Hill.
While the city assumed that all its money had been invested with BB&S Inc., a securities broker dealer registered with the SEC and a member of the National Association of Security Dealers, about $5.6 million was transferred by the company to another entity, Bevill, Bresler & Schulman Asset Management Corp.
The District never received written confirmation that most of its investment had gone to a firm that had not been approved by Hill until Monday, when the news broke that the Bevill, Bresler & Schulman group was going bankrupt.