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Saturday, January 09, 2010
Scandal Costs State Millions
By Mike Gallagher
Copyright © 2010 Albuquerque Journal
Journal Investigative Reporter
The State Investment Council has asked for nearly $6 million in additional money to cover legal expenses associated with the ongoing investment scandal, and a leader in the state Senate is none too happy about it.
"It just doesn't make any sense to me," President Pro Tem Tim Jennings, a Roswell Democrat, said Friday. "I'm concerned that everyone is concerned with protecting themselves instead of protecting the public."
The State Investment Council wants a $1.7 million budget adjustment and a $4 million supplemental appropriation to cover the legal expenses. Much of the money would go to a San Francisco law firm that is charging up to $950 an hour and can earn up to $5.8 million under a contract that started at $30,000.
Jennings is concerned about the cost and the fact, he says, that the contract has been amended several times without going out to bid.
"I'm just a sheep rancher," he said, "but after 35 years in government I've got a great deal of concern about a contract growing like this."
Investment Council spokesman Charles Wollman defended the contract.
"We share the concern over the increased expense, but the need to respond to the federal subpoenas was immediate and necessary," he said. "We are fulfilling our commitment to these ongoing federal investigations."
The SIC has been linked to a pension fund scandal in New York and has been responding to federal grand jury subpoenas here and subpoenas from the Securities and Exchange Commission office in Denver.
The founding partner of the Investment Council's former private equity investment adviser, Aldus Equity Partners of Dallas, has pleaded guilty in the New York scandal and is cooperating in the New Mexico investigations.
Saul Meyer, who headed the now-defunct advisory firm, said in his guilty plea that he violated his fiduciary duty to the state of New Mexico by recommending investments that were not necessarily in the best interests of the state because he was pressured by "politically connected individuals".
The federal investigations here also include payments made to third-party placement agents (finder's fees), especially up to $22 million paid to former Santa Fe broker Marc Correra, the son of a close friend and adviser to Gov. Bill Richardson.
The FBI and SEC have interviewed former State Investment Officer Gary Bland and received millions of pages of documents in connection with the investigation.
Bland resigned his $307,000-a-year post in October after an SIC subcommittee pushed for a vote of no confidence in Bland's stewardship of the $12 billion permanent funds.
Contract growth
This week, Jennings requested an attorney general's opinion on the legality of a contract between the State Investment Council and the San Francisco law firm of Paul Hastings Janofsky & Walker LLP.
The contract was originally capped at $30,000 and scheduled to end June 30, 2006.
Since that time, the contract has been renewed and amended several times and Jennings believes that has been done without bids.
• On June 1, 2009, the contract was capped at $800,000.
• On June 28, the contract cap was revised to $2.8 million.
• On Nov. 17, the cap was revised again to $5.8 million.
The scope of work the law firm was contracted to do also changed.
Originally, the firm was hired to conduct negotiations with respect to investments.
In June 2009, that expanded to include advice and assistance reviewing documentation and responding to subpoenas.
In November, the scope was again expanded to include an internal review of SIC operations in response to the investment scandal.
Wollmann said none of the money being paid to the San Francisco law firm is going to defend anyone in any lawsuits or in any criminal defense.
According to the internal legislative memo, it was the review by the firm that led the subcommittee to try and push Bland out the door.
The legislative memo said, "While expensive, it appears that the internal review being performed by the Paul Hastings group has yielded results." And it discusses Bland's resignation.
The subcommittee members were told, according to one member, that Bland had referred firms seeking state investments to third-party placement agents.
Bland has denied that.
Bland was close to the elder Correra and was apparently alone in knowing that Marc Correra was getting huge placement fees for SIC investments.
Wollmann said the SIC is not opposed to an AG review. "We believe we followed our procurement policies," Wollmann said. "We followed those."
Other expenses
Meanwhile, legislative staffers are concerned about if and when lawmakers and the public will be informed of the eventual findings of the "internal review" the law firm is conducting.
"That is an ongoing review," Wollman said. "We need to make sure this never happens again."
Jennings said he's also concerned about the growing legal expenses for other aspects of the scandal, including lawyers for state employees being questioned by federal investigators.
"These people are all worried about covering their own butts, not protecting the public," Jennings said.
As a result of the federal investigations, the SIC has approved a new legal representation policy for the agency, providing lawyers charging up to $500 an hour, for council members and employees.
Six firms have been awarded contracts totaling $320,000.
That's on top of the $438,000 the state has spent fighting two lawsuits filed by former Educational Retirement Board investment officer Frank Foy.
Foy filed two lawsuits under the Fraud Against Taxpayers Act, alleging widespread corruption in state investments, naming about 100 defendants in the two cases.
Wollmann said the SIC and ERB losses over the past year and a half were the result of the financial crisis and not corruption.
"The public is paying to stonewall the one guy who is trying to recover the money the public lost," Jennings said. "That doesn't make sense to me."
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