Friday, January 30, 2015

A Convenient Opinion: Charles Baker’s New Jersey Campaign Contribution was Legal

A Convenient Opinion:  Charles Baker’s New Jersey Campaign Contribution was Legal

An auditor for the State Treasurer of New Jersey issued a long awaited report concerning a $10,000 campaign contribution by Massachusetts Governor Charles Baker to the State Republican Committee in New Jersey.[1]  Before becoming Governor, Mr. Baker had been an operating partner for General Catalyst, a venture capital firm that won a mandate from New Jersey’s public pension plan.  New Jersey has a law that prohibits employees of its money managers from making campaign contributions within two years of soliciting and winning a mandate.  The auditor has concluded that the contribution was not a violation of New Jersey’s law.

In my view, the auditor may have reached the right conclusion but for a completely wrong reason.  In addition, the entire process of resolving this issue has further undermined the integrity of New Jersey’s public pension.

The auditor opined that Mr. Baker’s contribution didn’t violate the law because he was not involved in the specific General Catalyst fund that New Jersey’s pension plan had invested in.  This is a convenient theory, but it is totally inconsistent with the plain language of New Jersey’s statute.  The statute refers to investments made by any investment professional of an investment firm.[2]  The auditor has created a huge loophole, which will enable money management firms to make contributions to New Jersey’s governor so long as the contributor isn’t involved in the specific fund invested in by the pension plan.  Large private equity firms and hedge funds will have no problem meeting this standard.

The auditor would have been on more solid ground if he had ruled that Mr. Baker wasn’t an investment management professional.  While Baker used a partnership title on his business card, he appears to have been an executive-in-residence at General Catalyst, rather than an economic partner. Mr. Baker was a health care executive who sat on boards and provided industry expertise.  In other words, he wasn’t involved in actually acquiring companies, managing any fund, or managing General Catalyst.

The auditor’s ill-conceived opinion may be the result of New Jersey’s deeply flawed process in dealing with this matter.  Rather than awaiting the auditor’s decision on the legality of Mr. Baker’s contribution, New Jersey sold the investment to Washington University’s endowment.  I suppose this hasty decision was intended to clear the air.  However, it made matters worse.  By selling, New Jersey was implying that the contribution was illegal without formally admitting it.  Although the facts in the matter were clear, New Jersey postposed the decision on the legality of Mr. Baker’s campaign contribution until after Election Day.

Apparently the General Catalyst fund was performing well.  While New Jersey may have made a profit by selling the investment to Washington University, it gave up some of the remaining profits on unrealized investment. In short, the beneficiaries of the plan gave up a perfectly good investment for political reasons.

With the election out of the way and Mr. Baker elected as Governor of Massachusetts, I am sure New Jersey politicians were trying to avoid a finding of illegality and were trying to set a precedent that wouldn’t hinder their fund-raising efforts in the future.  Clearly, the auditor’s decision meets the needs of the politicians.  However, it is a poorly reasoned decision that further undermines any confidence the citizens of New Jersey or the beneficiaries ought to have in the stewards of those pension plans.

[2] N.J.A.C. 17:16-4.3(2).

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