Pay-to-Play in America, Part 3: 'Money Rarely Raises Its Voice'

We generally assume that the one who pulled the trigger intended to fire the gun, or that the person who poured and lighted the gasoline intended to start the fire.

Pay-to-Play in America, Part 1

Pay-to-Play in America, Part 2: The Subtle Side of the Game

Pay-to-Play in America, Part 3: 'Money Rarely Raises Its Voice'

Pay-to-Play in America, Part 4: The SEC's Proposal for Regulating Pay-to-Play

But in the world of privately financed political campaigns, it's usually impossible to tell whether a contribution was intended to promote the general welfare or simply to buy favor.

As so aptly put by Mike Robinson of the Associated Press, "when money talks it rarely raises its voice."

The Pay-to-Play Problem

This is the heart of the pay-to-play problem. Money managers make campaign contributions to state and local officials, who then hire the same managers to invest public pension funds. Is that enlightened citizenship, or civilized bribery?

The only admitted motive for the contributions is, of course, that the recipient will do a better job. Whether the contributor was also (or perhaps solely) motivated by the desire to win business is usually impossible for anyone but the contributor to know.

But sometimes politicians slip up, exposing themselves as double-breasted extortionists practicing a form of agnostic citizenship. A memo fails to make it to the shredder. A microphone is left on. A fax is sent to the wrong number. The result can be an illuminating -- if ugly -- snapshot of raw power in action.

'Time to Belly Up'

Consider the made-for-TV trial of Miriam Santos, a protege of Chicago Mayor Daley who worked nights at a factory while putting herself through college. She rose through the ranks to become Chicago's city treasurer.

Federal prosecutors charged Santos with extortion when her demands for campaign donations were caught on tape.

"This is no choice," Santos told a Fiji Securities representative. "They sat in here and asked for my time and asked for my help and asked for my business, I was there -- now it's time for people to belly up."

As if Santos' words weren't enough, prosecutors showed that seven brokerage firms, including Fiji, were blacklisted from receiving city business.

Sound like an easy conviction? Not quite. The jury took two days to convict, and then on only one of the five counts of extortion. Just two hours after being sworn in for her fourth term, Santos had to step down.

Eight months later, Santos' conviction was overturned, after which she triumphantly reassumed her position as treasurer.

The feds promised to prosecute Santos again. Apparently concerned that they couldn't get a pay-to-play conviction, however, they ultimately settled for Santos' resignation and her guilty plea for using her government office for campaigning.

The moral of the Santos trial, as reported in numerous epilogues, is not that rewarding campaign contributors with management and brokerage contracts is illegal, but rather that it's illegal when done explicitly -- and even then, you've got a good chance of getting off.

"I don't think you say, 'It is time to belly up,' " one Democratic political operative explained to the Chicago Tribune. "But you might say, 'I am very disappointed you weren't able to help out.' The words are different and deliberately ambiguous, but the message is the same."

In other words, money rarely raises its voice. So just let it do the talking for you.

'Those Who Give Will Get'

In some cases, like Santos', in which politicians have slipped up and left direct evidence of pay-to-play, investigators haven't even managed to bring a case.

In the late '80s, New York Comptroller Edward Regan was investigated by then-U.S. Attorney (and future New York Mayor) Rudolph Giuliani, Manhattan District Attorney Robert Morgenthau, and the state Commission on Government Integrity in connection with the awarding of lucrative state contracts to contributors to his political campaigns.

There were reports that Regan's campaign committee routinely solicited contributions from the big financial houses and Wall Street brokerage firms. The New York Daily News reported that a key staff member wrote in a memo that, to encourage campaign contributions, Regan should "make it clear that those who give will get."

No charges were ever brought against Regan or his staff.

'Treasury Business Now'

When Connecticut State Treasurer Joseph Suggs Jr. finished his term, he inadvertently left a box of campaign notes in his office, thereby making them subject to public inspection.

The notes showed that Suggs and his campaign team specifically targeted firms that managed pension fund assets. The notes included computer printouts of firms and the amount of annual fees they received from the Treasury. Certain firms were marked "TB" -- for "Treasury business now."

Of the 86 firms with Treasury business, excluding investment bankers who were prohibited by SEC rules from making campaign contributions, 46 contributed $90,000 to Suggs' campaign, accounting for 17% of his take.

Suggs' campaign manager admitted that they targeted firms that had Treasury business, and recalled one Boston money manager becoming irate and charging him with blackmail.

Suggs' challenger, Christopher Burnham, described the process as "Suggs' shakedown."

Stop Pay-to-Play by Stopping Pay-to-Play

These cases show why money managers should be prohibited from contributing to public officials who are in a position to reward those managers by hiring them to invest public money.

First, the cases provide direct evidence that the campaign contributions and management contracts are part of a quid pro quo.

Second, they demonstrate that the prohibition should be unconditional. Some argue that contributions should be prohibited only when they are made to win business, but this approach simply will not work. Even when the evidence of extortion is blatant, convictions are difficult or impossible to obtain.

Another reason a flat prohibition is needed is that the pressure to pay-to-play is universal. Even honest politicians and money managers feel constrained to participate. Understandably, they feel disadvantaged if they refuse to accept or make campaign contributions when contributions are being accepted or made by their competitors.

Academics diagnose this as the "problem of collective action." I prefer the better-known explanation, "the laws of human nature."

The SEC proposed to prohibit pay-to-play in August 1999. And Paul Roye, head of the SEC's division responsible for regulating money managers, promised last year that the SEC "must, and will, act by specific regulation to prevent the practice of buying government business with campaign contributions."

Although some commentators believe the rule has been deep-sixed with the advent of the Bush administration, acting SEC Chairman Laura Unger said last month that the SEC's "commitment to eliminate pay-to-play practices ... remains unabated." There may yet be hope for the rule, as discussed in the fourth and final part of this series.

Part 4: The SEC's proposal for regulating pay-to-play