Perhaps Legal, but not Ethical: Campaign Contributions in the Chicago Mayor’s Race
Recently Rahm Emmanuel publicized his record on ethics as he runs for re-election in Chicago, even as he takes in large amounts of campaign cash from the financial services industry. Those contributions include money managers who do business with the city’s public pension plans. The Mayor’s race in Chicago and the recently concluded Governor’s race in Illinois demonstrate the short supply of ethical behavior is a bi-partisan affliction. I’ve previously written about Governor-elect Bruce Rauner, the founder of private equity firm GTCR. Unfortunately, Mayor Emmanuel is engaging in the same unethical campaign finance practices. The reporting comes from David Sirota of the International Business Times, who has tirelessly unearthed large campaign contributions emanating from money managers who do business with Chicago’s public pensions.
In Mr. Sirota’s article last week, he documents $100,000 in contributions from senior executives at Madison Dearborn Partners, a private equity manager, and $50,000 from John Buck, the principal of the John Buck Company, a real estate manager. As Mr. Sirota has reported in previous articles, these contributions are part of an ongoing effort by money managers to finance Mr. Emmanuel’s re-election bid. As Mayor, Mr. Emmanuel appoints some of the trustees to the city’s public pensions. Those trustees, in turn, hire money managers. While the lawyers representing Madison Dearborn and John Buck may have found a narrow path to make these donations legal, they can’t make them ethical.
It’s clear that Mayor Emmanuel has a potential legal problem, because he has asked the City’s Ethics Commission to declare that the city’s public pensions aren’t city agencies for the purpose of banning campaign contributions by vendors. The Commission’s opinion may make the Madison Dearborn and John Buck contributions legal, but it doesn’t make them ethical or any less corrupting.
These contributions also have to pass muster with the SEC’s “pay-to-play” rule, which severely limits the amount of money a money manager can contribute to the campaign of anyone involved in hiring the money manager or appointing the folks who hire money managers. Once again, we’re seeing the lack of ethical standards on the part of the Mayor and the money managers. In each case the money manager’s contribution is meant to slip past the SEC’s restrictions in order to deliver large sums of cash to the Mayor’s campaign. In Madison Dearborn’s case, they are trying to hide behind the fact that they manage money for a city pension through Adam Street Partners, a fund-of-funds. Thus, they haven’t been directly hired by the City, which might put them beyond the reach of the SEC. By sticking an intermediary between themselves and the pension, Madison Dearborn may have found away to skirt the SEC and prevent the public from knowing how much they are charging the pension for their services. The fund-of-fund structure also obscures the PE firm’s investment performance. Madison Dearborn most assuredly has the legal resources to vet their campaign contributions. After all, they are major donors to all sorts of campaigns (Republican, Democrat, PACs). This isn’t about ideology. It’s about business. It’s a win for Mr. Emmanuel and Madison Dearborn, but not for the pensioners or the public.
John Buck isn’t hiding behind a fund-of-funds. The real estate firm is claiming that since they’re not registered with the SEC, the agency’s pay-to-play rules don’t apply. Mr. Buck writes large campaign checks (e.g., $94,500 to Mr. Rauner’s Gubernatorial campaign). Thus, we can assume he has hired some savvy lawyers and compliance officers to steer his campaign contributions through legal channels. Even if the SEC ultimately agrees that Mr. Buck’s contributions to the Mayor are beyond the reach of their rule, the contributions aren’t ethical.
Between the Citizens United and the bi-partisan legislation enacted by Congress last week, we have few, if any, limits on campaign contributions at the national level. In Illinois and Chicago, we see can see how big campaign money works. The checks may be legal, but they make a mockery of ethics.
 “When a PE Executive Runs for Governor: Bruce Rauner in Illinois”, 10/3/14.