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A federal investigation more than 300 miles away has prompted Tucson's largest school district to quietly sever ties with its financial adviser.

Tucson Unified School District officials and their attorneys said the decision will affect the fiscal management of TUSD's bonds, which was overseen by First Southwest Co. But they said the decision should not affect the projects funded by the $235 million bond passed in 2004.

Officials said it was in TUSD's best interests to disassociate itself from First Southwest, which has come under the lens of a massive federal corruption case in El Paso.

But without a nationally recognized firm to leverage low interest rates, it remains to be seen how TUSD will fare with a new financial adviser.

The corruption case in El Paso isn't the only problem for First Southwest with Tucson implications, either. On Halloween, TUSD was served with a subpoena from the U.S. Securities and Exchange Commission, the nation's top investment regulator. TUSD has since handed over hundreds of documents on its partnership with First Southwest and bond-related business trips to New York.

Though TUSD officials believe the investigation is part of a national spot audit of municipal financial advisers, the SEC refuses to comment on the case.

First Southwest did not return multiple phone calls this week for comment.

During a special board meeting Tuesday, TUSD's Governing Board unanimously approved a resolution granting Superintendent Roger Pfeuffer and Finance Director Pat Beatty the authority to hire a new financial adviser as TUSD moves forward with projects funded by the $235 million bond.

Pfeuffer said Wednesday that he and Beatty would seek a new financial adviser either from a state list of contractors or through a state cooperative group. Inquiries already have been made to prospective new advisers as to availability, rates and whether the company is under investigation, Pfeuffer said.

First Southwest brought the El Paso investigation to TUSD's attention, Pfeuffer said, noting there's no proof of any wrongdoing on the part of the financial-advising company.

However, if TUSD continued working with First Southwest, it would have to publicly disclose the company's connection to the El Paso investigation, explained Scott Ruby, TUSD's legal adviser on bond issues.

"We do not want to be involved with an organization that would cast doubt on our business dealings," Pfeuffer said.

First Southwest helped TUSD get low-interest rates on the 2004 bond, achieved substantial savings on bond refinancing, and generally kept the board well-informed of the company's role as a financial adviser, said TUSD Governing Board president Joel Ireland.

"I've been really happy with First Southwest's work," he said. "They've done a great job for the district. But until this El Paso matter is cleared up, it could adversely affect the district."

TUSD plans to soon issue $47 million in bonds from the 2004 bond to continue school improvement. The 2004 bond funds so far have paid for more than 100 new classrooms, five new gyms, library renovations, fine-arts facilities and new buses, said Rudy Flores, TUSD's executive director of engineering and facilities. Plans for the upcoming year include continued construction of permanent facilities for Mary Meredith K-12, a new West Side transportation center and site selection for two new schools, he said.

Little has been publicly disclosed about First Southwest's role, if any, in the federal corruption case.

In November 2005, the U.S. Senate initiated an investigation of government contractors in El Paso. Two county officials — an El Paso county commissioner and a former county chief of staff — have since pleaded guilty to corruption charges, including seeking bribes from county vendors and trading county votes for money.

The first guilty plea came in June from former county chief of staff John Travis Ketner, who implicated a former El Paso County judge, county commissioners, prominent El Paso attorneys and a county clerk in the scandal. In a federal court filing, Ketner said First Southwest "failed to pay him the requisite bribe to maintain their contract with the county."

In April, according to Ketner's filing, three county commissioners implicated in the case voted to strip First Southwest of its financial advising contract with El Paso County.

One month after Ketner's admission of guilt, former El Paso County Commissioner Elizabeth Flores pleaded guilty, admitting she took bribes in exchange for her vote, including awarding financial-advisory contracts.

First Southwest is one of the largest financial-services firms in the country.

TUSD hired the company as a financial adviser in November 2003 after a three-person committee of administrators selected the Dallas-based firm from a pool of four contenders, according to records submitted to the SEC and obtained by the Arizona Daily Star through a public-records request.

The Governing Board approved a multiyear contract not to exceed five consecutive years, and First Southwest would "counsel in areas of financial planning, surveying and analysis, future financings, recommendations for debt instruments, market information, and elections for (TUSD's) bond program." The following year, First Southwest helped TUSD successfully pass its 2004 bond.

In November, along with other financial advising companies that oversee municipal bonds, First Southwest was served with a subpoena by the SEC. As one of First Southwest's clients, TUSD also was subpoenaed.

B. David Fraser, an SEC lawyer based in Forth Worth, Texas, filed the five-page subpoena, which asked specifically for all details and documents regarding trips by TUSD and First Southwest to New York to meet with bond-rating agencies.

The agencies grant credit rating for municipalities and school districts that issue bonds. TUSD provided the SEC with records from trips in early 2004 and in 2005.

Ruby said the SEC investigation should not affect TUSD's bond rating nor any of its bond projects and noted that many other companies are facing the same scrutiny.

"The SEC has asked those questions of a number of financial advisers across the country," he said.

Pfeuffer and TUSD Attorney Robert Ross remain unsure of the investigation's findings or any possible conclusions.

"We've asked for a word on the investigation and they've said only that it's ongoing," Pfeuffer said. "We have cooperated fully with the SEC in providing them documentation."

The SEC would not discuss the case. "It's our policy that we cannot comment on the existence or status of any investigation," said Stephen Webster, assistant regional director of the SEC's Fort Worth office.

Pfeuffer said that, ideally, TUSD's new financial adviser will be selected by August, when TUSD will set the new tax rate for the coming school year with Pima County officials.

On StarNet: To see PDFs related to the investigation, such as guilty pleas and subpoenas, view this story online at azstarnet.com.