Audit: Massachusetts Gov. Didn’t Violate Pay-to-Play Rules With Donation That Preceded Pension Investment

shaking hands

In 2011, Massachusetts Gov. Charlie Baker donated $10,000 to the New Jersey Republican State Committee.

Less than a year later, New Jersey committed $25 million in pension money to General Catalyst Partners for management – the firm where Baker was an executive.

The transaction raised the red flags of a pay-to-play violation.

But an audit released yesterday cleared Baker of any wrongdoing.

From the Associated Press:

A New Jersey treasury audit has found Massachusetts Gov. Charlie Baker did not break pay-to-play rules when he donated to Republicans here in 2011.

[…]

New Jerseys regulations bar the state from investing with a firm whose managers made political contributions within a two-year window. The audit says while Baker was an investment professional, he did not provide the kinds of services the policy prohibits.

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The audit also suggests Baker and General Catalyst forcefully resisted the possibility of any wrongdoing. For example the firm wrote to the auditor in May 2014 that “Mr. Baker has never been an executive officer, owner or other control person of GC and has never solicited investors when GC raised funds.”

Baker himself hired the law firm Covington & Burling, which expressed a similar view, the audit said.

While the report recommends the state should consider strengthening its due-diligence procedures, the audit said the State Investment Council, the body that sets investment policy, reported it met those standards.

The audit was released and presented at the Thursday meeting of the State Investment Council.

 

Photo by Truthout.org via Flickr CC License

Incoming Massachusetts Governor to Push for Transparency at MBTA Fund

Charlie Baker

Massachusetts Governor-elect Charlie Baker says he will push for more transparency and openness from the MBTA retirement fund.

Baker’s statements come days after it was reported by the Boston Globe that the pension fund posted its annual report a full year late; the fund also waited a year to disclose troubles at a hedge fund that held pension money. The hedge fund is now shutting down in the wake of civil fraud charges brought against its executives.

From the Boston Globe:

The incoming Baker administration will press for greater openness at the MBTA retirement fund and encourage it to operate more like other pensions for public workers, a spokesman for Governor-elect Charlie Baker said Monday.

“The governor-elect wants to protect the pensions of hard-working MBTA employees and feels greater transparency and disclosure could help the pension board make better investment decisions,’’ the spokesman, Tim Buckley, said in a statement. Given the significant investment of taxpayer dollars in the MBTA, he said, Baker “feels it is appropriate to explore ways to align the MBTA pension board’s investment practices with those of other public pension boards.”

[…]

Baker’s spokesman declined to offer specifics on how he might tackle the issue. The pension fund is organized as a trust and in 1993 won a Supreme Judicial Court ruling that it does not have to make records public, hold open meetings, or follow the ethics rules of public agencies.

[…]

A governor’s main leverage with the MBTA pension fund is indirect. Governors get to appoint people to the seven-member Department of Transportation board, which in turn sends three “management” appointees to the six-member T retirement board.

Read more Pension360 coverage of transparency issues at the MBTA fund here.

 

Photo by  Marissa Babin via Flickr CC License

Implications for Pension Investments As Elections Put Ex-Financial Firm Executives in Office

voting sign

The results of several state-level elections could have implications for pension fund investments as three ex-financial firm executives became their states’ respective governors.

David Sirota writes:

Wall Street firms and executives have poured campaign contributions into states that have embraced the strategy, eager for expanded opportunities. Tuesday’s results affirmed that this money was well spent: More public pension money will now likely be entrusted to the financial services industry.

In Illinois, Democratic incumbent Pat Quinn was defeated by Republican challenger Bruce Rauner, who made his fortune as one of the namesakes of Golder, Thoma, Cressey & Rauner (GTCR) – a financial firm that manages more than $40 million of the state’s $50 billion pension system. Rauner — who retains an ownership stake in at least 15 separate GTCR entities, according to his financial disclosure forms— will now be fully in charge of the pension system.

In Rhode Island, venture capitalist Gina Raimondo, a Democrat, defeated Republican Allan Fung. Raimondo retains an ownership stake in a firm that manages funds from Rhode Island’s $7 billion pension system. Raimondo’s campaign received hundreds of thousands of dollars from financial industry donors. She was also aided by six-figure PAC donations from former Enron trader John Arnold, who has waged a national campaign to slash workers’ pensions. Fung slammed Raimondo as a tool of Wall Street, but she eked out a victory after a libertarian-leaning third party candidate, Robert Healy, unexpectedly siphoned votes away from Fung.

In New York, Gov. Andrew Cuomo, a Democrat, handily defeated his Republican opponent, Rob Astorino, after raising millions of dollars from the finance industry. The New York legislature is set to send Cuomo a bill that would permit the New York state and city pension funds to move an additional $7 billion into hedge funds, private equity, venture capital, real estate and other high-fee “alternative” investments. Assuming the standard 1 to 2 percent management fees applies, that could generate between $70 million and $150 million a year in fresh fees for Wall Street firms.

Cuomo has not taken a public position on the bill, but his party in the legislature passed it by a wide margin, and he is widely expected to sign it into law.

In Massachusetts, Republican Charlie Baker appeared early Wednesday to have secured a narrow victory over Massachusetts Attorney General Martha Coakley. Baker was a board member of mutual funds managed by a financial firm that also manages funds from Massachusetts’ $53 billion pension system. Baker is also the subject of a New Jersey investigation over his $10,000 contribution to the New Jersey State Republican Party just months before New Jersey Gov. Chris Christie’s officials awarded his firm a state pension deal. Christie, whose Republican Governors Association spent heavily to support Baker’s campaign, blocked the release of documents related to that investigation until after the election.

Read the full analysis here.

 

Photo by Keith Ivey via Flickr CC License

New Jersey Blocks Public Release of Pension Pay-to-Play Investigation

magnifying glass over twenty dollar bill

In 2011, politician and businessman Charlie Baker made a $10,000 contribution to the New Jersey Republican State Committee. At the time, he was a partner at General Catalyst, a venture capital firm.

Months later, New Jersey’s pension system gave a contract to General Catalyst to manage the state’s pension money.

After the potential conflict of interest was uncovered by journalist David Sirota, New Jersey launched an investigation into the situation.

But the state is now refusing to release the findings of the investigation. From David Sirota:

Christie officials have denied an open records request for the findings of the investigation.

In a reply to International Business Times’ request for the findings of the audit under New Jersey’s Open Public Records Act, Christie’s Treasury Department said the request is being denied on the grounds that the documents in question are “consultative and deliberative material.” Despite officials’ assurances in May that the probe would take only weeks, the New Jersey Treasury said in September that the investigation is still “ongoing” — a designation the department says lets it stop the records from being released.

IBTimes is appealing the open-records denial to the state’s Government Records Council. Neither Baker nor Christie responded to requests for comment on the issue.

General Catalyst and Baker have denied that Baker had anything to do with persuading Christie officials to invest in the firm. To try to verify that assertion, IBTimes filed a separate request for any General Catalyst documents sent to the New Jersey Department of Treasury prior to its investment. Those documents would show whether General Catalyst specifically promoted Baker’s involvement in the firm when pitching its investment to New Jersey.

Christie officials are pushing back the due date to release those documents to Nov. 6 — two days after the election.

New Jersey has fallen into a habit recently of denying public records requests. From the International Business Times:

The denial letters to IBTimes come only weeks after the Associated Press documented a spike in the number of open records requests that have been rejected by Christie officials. Since 2012, Christie’s administration has paid out $441,000 in taxpayer funds to reimburse open-records plaintiffs who were unlawfully denied access to government records.

“Open records requests to the executive branch have become even more highly politicized than usual,” said Walter Leurs, president of the New Jersey Foundation for Open Government. “These documents are subject to the open records laws and they are supposed to be disclosed within seven days, so this is stonewalling. They know that any lawsuit challenging the denials wouldn’t be heard for 60 days — which is well after the election.”

Charlie Baker has denied he worked for General Catalyst when New Jersey decided to give the firm a contract. But the firm’s website listed him as a partner, and Baker himself called himself a partner in  documentation related to his $10,000 contribution back in 2011.

Pension Scandals Put Christie In Deep Hole

Chris Christie pension scandal

Over at Naked Capitalism, Yves Smith has written a great post recapping the recent pay-to-play allegations surrounding Chris Christie and Robert Grady and untangling the web of relationships at the heart of the scandal. The post, in full, is below.

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By Yves Smith, Naked Capitalism

Memo to Chris Christie: when you are in a hole, quit digging.

If you have any appetite for political slugfests, an unusual one is playing out in New Jersey. Former Pando, now International Business Times reporter David Sirota has been digging into dubious connections between officials in various states who have influence over pension fund investments and their well-heeled Wall Street connections and patrons.

To give a very short summary of Sirota’s biggest current story, the IBT journalist has uncovered questionable connections with two prominent figures, Charlie Baker, who is a Republican gubernatorial candidate in Massachusetts, and former New Jersey pension fund chief Robert Grady.

First, a short background on the Baker story: Sirota showed how that Baker made a $10,000 donation to the New Jersey Republican Party shortly before Christie officials gave Baker’s firm a pension management contract. That donation ran afoul of the Garden State’s pay-to-play rules that bar contributions from executives and partners of entities that manage state pension funds.

New Jersey launched an investigation into Sirota’s charges and announced that as a result, it was exiting the contract with Baker’s firm.

In a sign that Sirota is drawing blood, Christie himself, as well as members of his administration, have launched personal attacks on Sirota rather than making honest rebuttals to his charges (another strategy has been to misrepresent the stringent requirements of the state pay-to-play law). The paper of record in Massachusetts, the Boston Globe, has yet to deign to report on this scandal.

Sirota has also been probing the relationships among state pension fund investments and the holdings of long-standing Christie friend and pension fund overseer Robert Grady. The Christie administration has denied, forcefully, that Grady had any financial interest in firms that benefitted from New Jersey pension fund investments on his watch. That word “interest” is critical, because that’s the term of art in the New Jersey pay-to-play law. And in reading the discussion that follows, bearing in mind that New Jersey rules bar state officials from “being involved” in “any official manner” in which they have direct or indirect personal or financial interest.*

From the article:

Grady was pursuing a new strategy, shifting money into hedge funds and private equity holdings in the name of diversification and higher returns. He was now pushing to entrust up to $1.8 billion of New Jersey pension money to the Blackstone Group, one of the largest players in private equity.

But one special feature of that Blackstone bet underscores the interlocking relationships at play as states increasingly rely on the counsel and management of Wall Street institutions to invest their pension dollars: One of the private equity funds New Jersey was investing in – a pool of money called Blackstone Capital Partners VI – claimed among its investors a Wyoming-based company named Cheyenne Capital. That company’s list of partners included one Robert Grady.

In short, Grady was pushing to invest New Jersey public money in the same Blackstone fund in which his own firm was investing — without disclosing that fact to N.J. officials.

There are two legs to Sirota’s charges. One is that Grady’s firm looks to have gotten preferential treatment from Blackstone. Documents from an SEC investigation state that Cheyenne made a total investment in the Blackstone fund of $2.69 million. That is well below its minimum investment requirement of $20 million.

Due to the opacity of these investments, it is impossible to ascertain whether Cheyenne might have gotten other concessions, such as reduced fees in the fund itself, by lowering the management fees or the performance fees paid by investors in the fund.

Another way that private equity funds reward preferred parties is by giving them co-investment rights, which allows them to invest in the portfolio companies directly and bypass fees at the fund level. We explained how that works last year:

Let’s look at a particularly egregious conflict involving the Boston law firm Ropes & Gray. Ropes is Boston’s ultimate Brahmin firm, with a pedigree dating back to 1865. Past partners including Henry Cabot Lodge and Archibald Cox.

Industry insiders report that Ropes does the legal work for Harvard’s investments in private equity funds… Ropes & Gray also represents two of Boston’s leading PE firms: Bain Capital and Thomas H. Lee Partners

The March 6, 1998 Federal Register contained an application to the SEC by Ropes & Gray to form an in-house 1940 Act “investment company” that would be owned by the employees of the firm in order to invest their capital. Critically, as part of its investment company application, Ropes sought and was granted by the SEC an exemption from the normally comprehensive and ongoing public reporting requirements to the SEC that investment companies normally provide.

How has RGIP been investing the Ropes partners’ money? Thanks to the SEC waiver, it’s impossible to know everything. But RGIP appears regularly as an investor in Bain and Thomas H. Lee (another top Boston-based PE fund) deals.

Pay attention, because the distinction I’m about to make is critical to understanding how stinky this is. I am not talking about RGIP being an investor in Bain and Thomas H. Lee funds. To the extent that were the case, RGIP’s interests would be aligned with Harvard as a fellow fund investor, since they’d be in all the same deals, be subject to the same gains and losses, and presumably pay the same or similar fees.

Instead, Ropes & Gray, Harvard’s counsel, is investing alongside Bain and Thomas H. Lee funds in which Harvard is an investor. From an economic perspective, Ropes & Gray is investing ahead of Harvard, because it is not paying the fees a limited partnership investor pays. Moreover, it may well be in an even more advantaged position by virtue by getting access to only the best deals (as in cherrypicking within the funds**) and could potentially better rights on other fronts than its client.

Let me stress: we have no evidence that Cheyenne got this sort of sweetheart deal. But we also can’t be certain that it didn’t. The cult of secrecy around private equity investments means the public, including New Jersey taxpayers, has no idea of knowing, beyond the concession on the minimum investment, whether Grady’s firm got other sweeteners as a result of the New Jersey investment in the same fund. And that is precisely why the New Jersey statues are so draconian on the issue of possible personal and financial conflicts of interest.

Grady provided strenuous denials that he has an “interest”; those statements don’t pass the smell test. As private equity industry expert Eileen Appelbaum remarked:

“Whether or not he has a direct piece of the action from this particular investment, he is a partner in the company that is going to benefit from the investment,” said Eileen Appelbaum, an economist at the Center for Economic and Policy Research and author of the book “Private Equity at Work.” “If the investment in Blackstone turns out to be profitable, his company is going to benefit from that.”

And don’t kid yourself that Grady was too remote to have had anything to do with the pension fund investment in Blackstone VI:

State Investment Council records show that Grady himself made the formal motion to approve the Blackstone deal, and then voted for it along with most members of the council. Former State Investment Council member Jim Marketti told International Business Times he had no recollection of Grady disclosing his firm’s investment in Blackstone at the time Grady had the council vote on the Blackstone investments.

Another questionable relationship involves the same Blackstone fund’s salvage of Knight Capital. Grady was on the board of Stifel, which was a significant customer of Knight and also joined in the rescue.

The details:

In August 2012, Blackstone Capital Partners VI used money from its investors to finance a deal involving Knight Capital Group, according to SEC documents. Knight had notably suffered losses in the wake of news that a computer glitch in its electronic trading system had sent share prices plummeting on the New York Stock Exchange. The infusion of Blackstone money stopped the bleeding. Blackstone had been joined in its rescue of Knight by another firm, Stifel Financial, which later acquired a piece of Knight’s trading and sales operations. Among the members of Stifel’s board was Grady, according to corporate documents.

According to SEC documents, Grady also owns more than 10,000 shares of the company’s stock, and N.J. financial disclosure forms show Grady is compensated for his position at Stifel.

In short, Blackstone Capital Partners VI applied its investors’ money — including funds from the New Jersey pension system — to co-invest with Stifel, whose board included among its ranks the overseer of New Jersey’s pension investments.

Does this look arm’s length to you? Factor this into your assessment:

[Christopher] Santarelli, the New Jersey Treasury department spokesman, said Grady’s State Investment Council would have no knowledge or influence over how Blackstone opted to invest the money in its fund. Yet a New Jersey investment official previously declared that state officials often influence the financial decisions of the private equity funds in which the state invests.

“We’re a large player,” said then-Division of Investment executive director Timothy Walsh, in a May 2011 interview with the Bergen Record. “We have impact.” He told the newspaper that state pension officials sit on advisory boards for most of the private equity firms with which New Jersey invests, adding that New Jersey’s pension system is better able to influence private equity firms’ decisions than those of companies whose stock it owns.

The New Jersey state pension system listed 600,000 shares of Stifel in its portfolio in 2013, according to the New Jersey Department of Treasury’s annual report. Stifel executives made $15,000 worth of contributions to the New Jersey Republican Party in 2011, according to campaign finance disclosures.

Assemblyman John Wisniewski, who heads the state’s Select Committee on Investigation, is pushing for an official probe into l’affaire Grady.

Even though it seems unlikely in the cesspool of New Jersey politics, it is still entirely possible that Robert Grady’s conduct regarding his dealings with Blackstone, both with the fund investment and the Knight rescue, were on the up and up. But even so, he clearly looks to have violated the state’s stringent laws about conflicts of interest.

And this case serves as yet another object lesson in how private equity’s draconian secrecy policies can foster corruption. Even if it didn’t actually occur here, it would be easy for it to have taken place.

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*Clearly, this restriction would not apply to cases where a pension fund executive held a public stock and a New Jersey pension fund bought shares in the same stock. The impact of the New Jersey buy, if any, would be too small and short term for the state official to derive any benefit.