More than two dozen firms that have surfaced in a broad corruption investigation of public pension funds gave at least $1.97 million in campaign contributions to officials with potential influence over the funds' investments, a USA TODAY analysis shows.
The givers included private-equity giants such as the Blackstone Group, the Carlyle Group and the Quadrangle Group, the firm founded by Steven Rattner, who in July resigned as the White House point man for the auto industry rescue. The contributions are legal, and the firms haven't been accused of wrongdoing related to the giving.
The analysis of donations since 1998 showed the money flowed in 30 states to incumbents and candidates for governor, treasurer and other posts that influence billions of dollars in pension fund awards.
Several of the firms won pension investment work after they, their executives or hired intermediaries gave contributions. The awards generate lucrative fees and lend prestige that could help lure new clients.
Several states are investigating the awards after charges last spring in New York that a former pension fund official, a political adviser and others got millions of dollars for influencing investments by the state's pension fund. The Securities and Exchange Commission has filed parallel civil charges.
The probes come as pension funds have increasingly invested more of their $2.2 trillion in assets with private-equity firms and hedge funds as they seek returns that outpace the stock market. The interest has been reciprocated, as the private firms vie for the fees involved.
The financial stakes have sometimes bred corruption. Kent Nelson, owner of a California investment business, pleaded guilty to devising a fraud scheme in a 2005 court case that accused him of paying a New Mexico official for state investment deals.
And in 2003, Charles Spadoni, the former vice president of a Boston investment firm, was convicted of racketeering, obstruction of justice and other charges in a case that accused him of agreeing to provide consulting deals to friends of Connecticut's treasurer in exchange for $200 million in pension fund awards. An appeals court overturned all but the obstruction conviction last year and ordered a new trial.
Conflicts of interest
Even in cases with no charges of illegality, watchdogs argue that the campaign contributions – known as pay-to-play – create conflicts of interest.
"The selection of investment advisers to those plans shouldn't be based on campaign contributions. They should be based on the merits," said Mary Schapiro, chairwoman of the Securities and Exchange Commission, which she said is probing potential pay-to-play cases "in multiple states."
The SEC in July proposed a rule that would disqualify firms from being awarded pension fund investments for two years after making campaign contributions over $250. Schapiro said the rule is crucial because pay-to-play practices harm pension fund beneficiaries by fostering "subpar advisory services at inflated prices."
New York Attorney General Andrew Cuomo, whose office began a now-two-year corruption investigation that has recently been expanded by other states, issued a code of conduct with similar restrictions earlier this year. The probes focus in part on charges that some firms met kickback demands by public officials or others in exchange for pension fund awards.