In late 1998, former Securities and Exchange Commission Chairman Arthur Levitt gave the SEC staff a research project. He wanted to know if money managers regulated by the SEC were donating money to public pension fund officials to win contracts managing the funds, a practice known as pay-to-play.
The staff found that, throughout the country, money managers routinely paid millions of dollars to campaign war chests of public pension fund officials, and that these officials just as routinely awarded the same money managers contracts to manage the funds.
The staff's impressive research is on file at SEC headquarters in Washington, D.C. Levitt lamented that, had he "given the staff more time, they undoubtedly [would have] uncovered even more examples of how the sacred duties of public fiduciaries are being compromised for political gain."
Nonetheless, the staff amassed an impressive collection of reports of pay-to-play in America, an abridged version of which is available at
Fund Democracy's
Web site. The
first part of this series provided a snapshot of straightforward dollars-for-contracts pay-to-play practices. This part explores other facets of pay-to-play that make
Bill Clinton's pay-for-pardons shenanigans seem mundane in comparison.
Bundling
Firms' ability to make campaign contributions directly often is limited, so the firms support their favorite candidates through contributions made by their employees. To ensure that politicians get the message, firm employees often make their contributions in unison, a practice known as "bundling."
On a single day in July 1993,
State Street Global Advisors executive Nick Lopardo and 12 of his employees, including his secretary, each made a donation of $1,000 to Massachusetts Treasurer
Joseph Malone's campaign.
Malone sits on a three-member committee for the $7.5 billion
Massachusetts State Teachers and Employee Retirement System Trust, which invested $1 billion in a Global Advisors index fund in 1993.
Lopardo says he didn't force employees to contribute to Malone's campaign, reports the
Wall Street Journal's James Hirsch, but doesn't deny asking for donations. In 1994, Massachusetts outlawed bundled donations arriving on the same day from people at the same firm.
Principals and affiliates of Wall Street firm
Rosecliff sent 12 separate checks totaling $4,700 to Oregon State Treasurer
Jim Hill's re-election campaign a couple of months before Rosecliff scheduled a meeting with Treasury representatives to seek business for the firm.
On a single day in December 1997, New York Comptroller
H. Carl McCall's re-election campaign received a total of $16,000 in donations from seven
Freeman Spogli executives. Three days later, the pension fund controlled by McCall invested $85 million in a fund managed by Freeman Spogli.
Hands Across America
Some money managers have such a strong sense of civic responsibility, they often feel obligated to contribute to state and local political campaigns taking place thousands of miles from their home offices.
State Street's Lopardo's largesse was not limited to Massachusetts firms. He donated $18,300 to California candidates while building up assets State Street managed for the
California Public Employees Retirement System (CalPERS) from nothing to more than $9.5 billion.
Henry Kravis and George Roberts of New York's
Kohlberg Kravis and Roberts donated a total of $5,000 to Minnesota State Treasurer
Michael McGrath's campaign, and received a $300 million investment from the $17 billion state pension fund on the board of which McGrath serves.
Oregon State Treasurer
Jim Hill also accepted contributions from New York firms seeking to do business with the state treasury. Connecticut State Treasurer
Joseph Suggs targeted financial firms in New York, Boston, Atlanta, Chicago and Los Angeles for campaign money. And New York-based
Apollo Partners and
Thomas Lee of Boston contributed liberally to California State Controller
Kathleen Connell's campaign. From 1995 to 1998, about than 40% of contributions to New York Comptroller H. Carl McCall's campaign came from out of state.
Weaver C. Barksdale of Nashville, Tenn., whose top officers gave $5,000 to Philadelphia mayoral candidate
Marty Weinberg, handles $19 million for the $415 million
Philadelphia Gas Works retirement fund.
A North Carolina firm,
NCM Capital Management, didn't have an office in Georgia, yet it was one of eight investment firms managing money for Georgia public pension plans that contributed a total of $49,800 to Governor
Roy Barnes' campaign in 1999. Barnes appoints several of the trustees who choose managers for the plans.
Wanted: Bureaucrat Experienced in Wining, Dining and Exotic Travel
Trustees overseeing public pension funds have a demonstrated talent for finding ways to benefit personally from their positions. Indeed, the perks of the job are often worthy of the
International Olympic Committee.
CalPERS board members took 112 foreign and out-of-state business trips from 1994 to 1997, one-third of which were at least partly subsidized by firms doing work for CalPERS.
Board chairman
William Crist alone accounted for 15 foreign trips, with destinations including Paris, Hong Kong and Australia, plus another 35 out-of state trips. State Treasurer and CalPERS board member
Matt Fong organized a $350,000 tour of Asia paid for, in part, by CalPERS contractors.
In the course of a grand tour of Eastern Europe in 1997, CalPERS members
Thomas Clark and
Robert Carlson attended receptions at U.S. embassies, were treated to a walking tour of Prague and paid visits to Krakow and Auschwitz.
CalPERS board members also have accepted free meals and tickets, as well as other freebies, such as covering their $500 entry fee for a charitable golf tournament.
All five members of
New Orleans' Municipal Employees Retirement Board accepted gifts from companies doing business with the city's $220 million pension fund. In 1994 alone, chairman
Jim Davis accepted 35 gifts of food, liquor or merchandise from financial consultants, including a golf round, drinks, lunch and dinner from Bob Phillips of
ASB Capital/Nations Bank just after Phillips had been named investment manager for the retirement fund.
The prize for the most creative perk goes to a California pension consultant who recommended that CalPERS invest $100 million with leveraged buyout firm
Hicks Muse. Not long after CalPERS made the investment, name partner Thomas Hicks paid the consultant $300,000 for a yacht, $45,000 more than the consultant paid for it. The consultant subsequently advised CalPERS to invest another $100 million with Hicks, Muse.
Firms doing business with the
Washington D.C. Pension Fund have paid for members' trips to Europe, Hawaii, Palm Springs, Lake Tahoe and Daytona Beach.
Board member
Rose Elder, who already had traveled to London and Berlin, apparently needed pocket money for trips to Italy, Australia, the Ivory Coast and South Africa. So she raised cash from money managers through a charity golf tournament that she ran.
About half of the outside money managers hired by the D.C. pension fund contributed tens of thousands of dollars to the tournament, which was ostensibly created to raise money for minority scholarships.
But the tournament seemed more committed to providing income to Elder. In 1989, the tournament took in more than $400,000. Only $4,000 went to scholarships, yet $32,692 found its way directly into Elder's pockets.
"Washington, D.C., is the political capital of the world. A pension fund in that city is a political operation. What would you expect?" one money manager explained to the
Washington Post's David Vise.
A Political Operation
Unfortunately, the cynical view that "a pension fund is a political operation" is borne out by evidence that pay-to-play is commonplace, much to the detriment of America's schoolteachers, fire fighters, police officers and other public servants whose retirement accounts are being invested by money managers who often qualify for the job by financing the political campaigns of public pension fund officials.
Despite overwhelming evidence, there are those who question whether a contributions-for-contracts quid pro quo really exists. In a letter to the SEC, U.S. Senator Phil Gramm suggested that the SEC rule should apply only when it could be
proved that a contribution was intended to buy favor.
As I'll discuss in part three of this series, an intent-based rule is no better than no rule at all. No court can get inside a money manager's head to determine what motivated a campaign contribution, and contributors rarely reveal their true motives.
Part 3:
The Problems of Trying to Police Pay-to-Play.
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