Tuesday, March 17, 2015

Blatant: New Jersey’s Pension and Campaign Contributions

Blatant:  New Jersey’s Pension and Campaign Contributions

For the past several years money managers have operated under a set of SEC rules that discourage executives from making campaign contributions to political officials who either make pension investments or appoint pension trustees.  Under the rule, managers are supposed to forfeit their fees if the violate the rule.  The rule has a strict test.  Make the contribution, whether or not it is intended to influence the public official or trustee, and you’ve violated the rule.  Intent isn’t required.

In New Jersey, which has had a history of political influence infecting its pension investments, there’s a rule banning money managers from making contributions designed to influence an investment.  David Sirota and a team of reporters for the International Business Times have found that the SEC and New Jersey rules don’t present much of an obstacle to certain financial executives who seem intent on funding Governor Chris Christie’s campaigns and doing business with the State’s pension plan.[1]

When Mr. Sirota first surfaced the issue in a story about contributions by Charles Baker, who is now Governor of Massachusetts, I was skeptical.[2]  I thought Mr. Baker’s affiliation with the private equity firm General Catalysts partners might not fit the legal definitions of the SEC or New Jersey rule.  However, over the months Mr. Sirota has continued to unearth one instance after another where money managers have been politically active in Governor Christie’s campaign efforts and recipients of money management mandates.

About a week ago Mr. Sirota detailed the relationship between Prudential Insurance[3], the Governor, and the state pension.  Yesterday he laid out the close connection between sizable contributions from Barry Stowe, a board member and senior executive of Prudential Plc (no relation to Prudential Insurance), and a $300 million mandate from the New Jersey pension.  Prudential Plc claims that Mr. Stowe was unaware that his company had won a $300 million mandate in New Jersey.

In my view there are only two possibilities.  Either Prudential Plc isn’t telling the truth, or the company has one of the worst compliance programs in the world.  During the latter stages of my career, I consulted with numerous money managers about the SEC pay-to-play rules.  Both my US and foreign clients wanted to make sure they understood the rule and created procedures and reports to prevent employees from violating it.          While foreigners are prohibited from making campaign contributions in US elections, their American employees are entitled to write checks to candidates and PACs.  However, if those employees are senior executives of the money manager or act as agents for the money manager, the SEC rules come into play. 

As I said to Mr. Sirota when he contacted me about Mr. Stowe and Prudential Plc, “This is about as blatant as I think I've ever seen in terms of timing.”  The award of the mandate and contributions practically fall one on top of one another.   Mr. Stowe is a large contributor to the Republican Party, and his donations aren’t limited to Governor Christie.  However, his contributions to the governor’s campaign and the Republican National Committee in 2013 look suspicious.  According to Mr. Sirota’s reporting, there’s a special irony in Mr. Stowe’s contribution to the RNC because at that very moment Governor Christie was trying to exempt RNC contributions from New Jersey’s pay-to-play rules.  Of course, under the SEC’s rules any suspicions about the timing are irrelevant.  The fact that Mr. Stowe made the contributions at all seems sufficient to trigger the SEC’s rule.

I have written extensively about the influence of politics in public pensions.  While I didn’t think New Jersey’s or the SEC’s rules would eliminate that influence, I naively expected the most blatant forms to disappear.  Apparently, I was wrong.

[1] http://www.ibtimes.com/chris-christie-officials-sent-pension-money-subsidiary-donors-foreign-firm-1847744?rel=most_read2
[2] http://pando.com/2014/05/08/exclusive-christie-officials-gave-millions-in-taxpayer-funds-to-major-tech-vc-in-apparent-violation-of-pay-to-play-rules/
[3] http://www.ibtimes.com/chris-christie-maintained-state-pension-investments-prudential-after-top-official-1843736?rel=rel1

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