State’s ERB Passed On Pay-to-Play Investigation

The missed opportunity came in March 2008 when longtime Educational Retirement Board employee Frank Foy resigned, claiming he was retaliated against by higher-ups because he complained about pay-to-play in the awarding of ERB investment deals.

Then ERB Chairman Bruce Malott angrily denounced Foy’s claims, but he ordered an independent outside investigation. It didn’t happen.

Fast forward to 2011:

♦ The state lost more than $90 million in just two of the investments questioned at the time.

♦ The scandal has cost the state millions of dollars in legal fees just to conduct investigations and respond to federal criminal and regulatory subpoenas.

♦ State Investment Officer Gary Bland lost his job, and Malott resigned.

♦ Several lawsuits have been filed alleging misconduct and seeking to recover money.

Foy named names in his resignation letter. They included Aldus Equity of Dallas, Vanderbilt Financial, HFV (a hedge fund manager) and others that have since figured in the state investment scandal.

Foy, who had been demoted from chief investment officer and transferred so he had to commute, claimed to have fought a losing battle against those who “awarded investment management contracts to people who make campaign contributions to important politicians.”

Malott, former Gov. Bill Richardson’s campaign treasurer, was angered by the allegations and threatened to sue Foy for slander. He called Foy’s claims “galling in light of the many hours of hard work each of us puts in.”

But in the same memo to ERB staff in which he denounced Foy, Malott wrote that “these allegations require a prompt and thorough investigation to protect the interest of our constituents and the integrity of the board and our fund.

“Accordingly, please take this communication as my directive that independent counsel be retained immediately and charged with making a full and complete investigation into Mr. Foy’s allegations of impropriety and to provide a written report of the investigation to the Board as soon as practicable.”

That never happened.

In addition to his directive for an outside investigation, Malott asked that copies of the report be provided to the U.S. attorney and the state attorney general if appropriate and promised to abstain in choosing the investigator and to cooperate with the investigation.

It was Jan Goodwin’s first day on the job as executive director of the ERB when Malott issued the order.

She responded in an email to Malott, “I think the entire matter should be reviewed and assessed by professionals outside ERB. I have been collecting names of firms that would be appropriate for this type of work.”

But the only report created was an internal document, which the Journal obtained through a request under the state Inspection of Public Records Act.

It outlines how the ERB entered each contract or investment mentioned by Foy in his resignation letter but doesn’t go beyond the ERB process.

In the end, there was no independent counsel or external investigation.

In fact, Foy says he was never even interviewed about his allegations.

‘There wasn’t any trail’

Goodwin, former secretary of the Taxation and Revenue Department under Richardson, became executive director of the ERB the last week in March 2008.

At Goodwin’s direction, the staff began an internal review of the ERB’s dealings with the eight companies named by Foy as being part of pay-to-play.

The internal probe found that the contracts and investments followed state procurement code and had been approved by a vote of the retirement board at public meetings.

Goodwin, a Democrat, had worked for Republican Gov. Gary Johnson and had raised questions about investment contracts under state Treasurers Michael Montoya and Robert Vigil.

She was an unsuccessful candidate for treasurer against Vigil in the Democratic primary, and Richardson supporters – including Malott’s accounting firm and Anthony Correra’s investment company – helped retire her campaign debt.

She testified against Vigil at his federal criminal trial, and both he and Montoya were sentenced to prison.

“There was a trail in the state Treasurer’s Office; you could figure it out from the records,” Goodwin said in a recent telephone interview in which she was questioned about the investigation conducted after Malott’s request. “But there wasn’t any trail to Frank’s (Foy’s) allegations.”

She said, “I had a hard time taking Frank seriously.”

In part, she said, that was due to “the visceral hate between him and Bruce (Malott).”

Anything Malott supported, she said, was opposed by Foy.

Goodwin decided not to hire an outside firm to investigate. She said she informed Richardson’s then-Chief of Staff James Jimenez of her decision.

The governor appoints three of the members of the ERB but isn’t involved in daily operations.

“Without anything to point to, I didn’t see any reason to hire a law firm at $500 an hour,” she said.

The trail became apparent, according to Goodwin, only when the New York Attorney General’s Office and the U.S. Securities and Exchange Commission exposed a pay-to-play scheme in March 2009 involving the New York State Pension Fund.

That scheme involved some of the same firms, or companies connected to firms, that Foy had complained about in his 2008 resignation letter.

Diversity in advice

Goodwin never interviewed Frank Foy as part of her inquiry.

“Nobody from the Educational Retirement Board talked to me after I left,” Foy said.

Goodwin said that, before he left the ERB, Foy’s supervisor, Bob Jacksha, had offered to go to law enforcement with him if he had specific evidence to support his allegations.

“These conversations occurred over several months, and Foy never could provide any specific evidence,” Goodwin said.

“There was nothing new in the letter,” she said. “There was nothing that cried out that I had to go talk with this gentleman.”

Goodwin was aware Foy objected to the ERB hiring the same investment advisers or investing in firms already working for the State Investment Council.

“I thought we needed to have diversity in the advice we were receiving in such a risky asset class,” Foy said in a recent interview.

Aldus Equity Advisors of Dallas was one firm working on private equity investments for the SIC and came highly recommended by Investment Officer Bland, who was appointed by Richardson at Malott’s request to serve as a member of the teachers’ pension board.

But Foy said his own background checks on Aldus found that other pension funds Aldus worked for wouldn’t recommend the firm. Foy said he informed his supervisors of the information.

But Foy said he didn’t know Aldus Equity and its founding partner, Saul Meyer, were tied to a kickback scheme to get business from the New York Pension Fund.

Nor did he know that Meyer recommended investments “that were pushed on me by politically connected individuals in New Mexico.”

Meyer told a New York court during his guilty plea in October 2009: “I did this knowing that these politically connected individuals or their associates stood to benefit financially or politically from the investments and that the investments were not necessarily in the best economic interest of New Mexico.”

Meyer has never publicly identified those politically connected people, but he agreed to cooperate with the U.S. attorney’s investigation in New Mexico. He is scheduled to be sentenced in New York next month.

Aldus, which advised the ERB and State Investment Council on private equity deals, was being paid more than $1.5 million a year for its investment advice.

Foy also said he didn’t know Marc Correra was getting paid millions of dollars in third-party placement fees for referring financial firms to the SIC and ERB.

Correra’s father, Anthony Correra, was an unofficial adviser to the Richardson administration and fundraiser for the Richardson political campaigns who had helped pick Bland as the state investment officer. He was also a close personal associate of the governor.

Although Foy said he was generally aware of Anthony Correra’s ties to the SIC, Foy said he only learned of Marc Correra’s role through Journal articles around the same time.

“Never met the man,” Foy said. “Never heard of him before.”

Third-party fees

By the time Foy resigned in 2008, Malott was threatening to sue him for slander, according to emails released to the Journal.

Malott told the Journal last week that, despite his orders for an outside examination, he was satisfied with Goodwin’s telephone call telling him there was no evidence to support Foy’s claims.

“Everything I knew about her at that time supported the fact that she would do an effective job investigating Mr. Foy’s allegations,” Malott said in a statement.

Malott said he didn’t agree with Foy about much, but he did agree with him in his opposition to third-party marketing fees.

When the scandal erupted, the ERB banned firms seeking business with the board from paying marketing fees for several months before allowing the payments under new disclosure rules that Malott, as chairman, supported. The SIC banned the practice and still does not allow it.

Independently of each other, Malott and Foy point to an August 2006 ERB investment in several hedge funds, including Deutsche Bank’s Topiary Trust.

Malott said he was contacted by a bank official in November 2006 asking him to talk to Foy about signing a document so the bank could pay a third-party marketer.

Malott said that at that time he didn’t know anything about third-party marketing fees and the bank official asked him to intervene.

“I felt at the time that these fees were wrong,” Malott said. “Since I agreed with Mr. Foy’s decision not to sign the documents, I never intervened in the process.”

According to ERB records Deutsche Bank didn’t pay any fees in connection with the deal, according to documents the bank supplied to the ERB.

Malott said he didn’t know third-party fees were being paid in connection with ERB business until May 2009, when the pension fund’s staff prepared a spreadsheet showing millions of dollars being paid to third-party marketers. A similar document was prepared at the same time for the State Investment Council.

“I would have opposed those payments if I had known about them,” Malott said.

— This article appeared on page A1 of the Albuquerque Journal