Do Campaign Contributions Help Win Pension Fund Deals?

Aug. 27, 2009— -- 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.

Cuomo's investigation so far has produced two guilty pleas and criminal charges against four defendants. The suspects include Hank Morris, a nationally known campaign strategist who was the top political adviser to former New York state comptroller Alan Hevesi, and David Loglisci, a former Hevesi aide at the nation's third-largest public pension fund. Both have pleaded not guilty.

The probe also is examining private investment firms' hiring of placement agents, intermediaries who at times use political connections to help win pension fund business. Several funds have recently banned the practice.

Cuomo said the alleged illegality and separate ethics issues uncovered in New York are part of "a nationwide problem."

Prominent givers

USA TODAY's analysis focused on private firms mentioned but not charged with wrongdoing in the pay-to-play cases filed by Cuomo and the SEC. The analysis, based on campaign financial disclosure data collected by the National Institute on Money in State Politics, found many contributions to pension officials in New York and elsewhere.

Prominent givers included David Rubenstein, co-founder of the Carlyle Group. He contributed $48,000 since 2002 to Hevesi's election bids, records show.

Carlyle manages nearly $1.5 billion for the New York state pension fund and received about $38.6 million in management fees since the state's 2004 fiscal year, said Robert Whalen, a spokesman for Thomas DiNapoli, New York's current comptroller.

Carlyle executives or employees also gave at least $114,375 to 18 pension fund officials or office seekers in 10 states since 1998, the campaign records show.

Those donations included at least $28,750 in California, where records of the state's main pension fund, the nation's largest, show it has committed more than $4.1 billion to investments in 28 Carlyle funds since 1996.

Carlyle surfaced in the New York investigation via its energy-related joint venture with Riverstone Holdings, a smaller private-equity firm. In 2003, a Riverstone executive learned the venture could get a New York pension fund management deal by retaining Morris "as a finder," according to the SEC's court complaint.

Carlyle agreed to the hiring even though it already "had its own in-house marketing operation and was spearheading the marketing efforts" for the joint venture, the SEC alleged.

Although the Carlyle-Riverstone team had previously managed only one small energy fund, the joint venture got a $500 million pension fund investment after hiring Morris. He was paid $4.75 million in fees on the deal, according to the SEC complaint.

In a June agreement with Cuomo's office, Riverstone agreed to pay a $30 million settlement and end its use of placement agents in seeking pension fund work.

In May, Carlyle agreed to pay $20 million and enact reforms to resolve its role in the New York case. The reforms included adoption of the Cuomo code of conduct, which bars investment firms from doing business with a pension fund for two years after making a campaign contribution to an official able to influence the fund's investment decisions.

Carlyle backed Cuomo's bid "to implement reforms that usher in a new era of transparency and accountability into the pension fund investment process." The firm said in a news release that it would file a lawsuit seeking $15 million in damages from Morris and the brokerage where he worked "for the harm" they caused Carlyle. Company spokesman Christopher Ullman declined to say whether the lawsuit has been filed.

Commenting on the campaign donations, Ullman said, "These contributions were given by Carlyle employees on their own behalf and were properly disclosed to the public." The firm now has a $300 limit on contributions to state or local officials, said Ullman, who added that the giving must be pre-approved by Carlyle's compliance officer.

Blackstone contributions

Officials of the Blackstone Group have similarly contributed to pension fund incumbents and candidates. The firm's chairman is co-founder Stephen Schwarzman, a former Lehman Bros. executive. Co-founder Peter Peterson retired as Blackstone's senior chairman in 2008.

Campaign finance records show Schwarzman; his wife, Christine; and Peterson gave a combined $30,000 to three candidates who ran in 2002 to succeed H. Carl McCall as state comptroller. Hevesi, the winner, got the most, $21,000. Separately, McCall received $25,000 from Christine Schwarzman for his unsuccessful bid for governor.

Blackstone has received about $1.74 billion in private equity- and real estate-related investments from the New York pension fund since 1993 and has been paid about $20 million in fees, said Whalen, the state comptroller's spokesman.

The firm has not been accused in the New York investigation.

Stephen Schwarzman gave $11,000 to Pennsylvania Gov. Edward Rendell's races in 2002 and 2006, campaign finance records show. Pennsylvania's governors by law appoint six of the state pension board's 11 members.

Blackstone's relationship with the Pennsylvania pension fund dates to at least 1994 and includes more than $2.8 billion in private-equity, real estate, stock and other investments, a state summary shows. The deals have paid about $129 million in fees.

Blackstone declined to comment directly on the Pennsylvania contributions. Spokeswoman Christine Anderson said the firm adopted a policy more than three years ago that required Blackstone's general counsel to approve campaign giving.

The policy "banned outright contributions to candidates for office with direct, day-to-day oversight" of public pension funds, Anderson said.

As the New York investigation expanded this year, Anderson said Blackstone "proactively" tightened the policy to include governors and others in pension funds' command chains.

Tightening regulation

The Quadrangle Group is a global private investment firm founded by Rattner, a chief architect of the federal bailout of Chrysler and General Motors.

In 2005, the firm sought an investment from the New Mexico State Investment Council, which manages the $12 billion state endowment created by oil, gas and natural resource extraction fees.

The nine-member council, chaired by Gov. Bill Richardson, approved a $20 million Quadrangle investment in November 2005, state records show. The award has generated about $1 million in fees for Quadrangle so far, said council spokesman Charles Wollmann.

Rattner gave $5,000 to Richardson's election committee in 2002, campaign finance records show. Long known as a major Democratic fundraiser and contributor, Rattner gave an additional $15,000 to Richardson in 2006, the records show. The gifts didn't pose a conflict because Richardson didn't vote on the Quadrangle investment, Wollmann said.

However, the panel in May approved a policy restricting campaign gifts by executives and others connected to firms that receive investments. It bans campaign gifts to elected and appointed officials serving or seeking posts "that may have influence over" the investment council and other state investment boards. The ban applies during the term of investment deals and for two years after. Had it been in effect then, it could have barred Rattner's 2006 contribution to Richardson. Quadrangle declined to comment.

The SEC pay-to-play proposal, unveiled July 22, would impose a two-year ban on pension fund awards to advisers that have given more than $250 in campaign contributions to any public official able to influence the fund's investments. The rule would cover donations to incumbents and challengers and would apply to investment executives, their firms and some employees.

The proposal is similar to a never-enacted 1999 SEC plan. It would bar investment advisers from directing political action committees or intermediaries to make such contributions. It would also bar investment advisers from paying intermediaries to solicit pension fund investments and would prohibit indirect contributions.

The SEC is scheduled to set a final vote on the crackdown after a 60-day public comment period.

"It's certainly an issue that we think, based on our enforcement experience, really deserves our attention," said Schapiro.