February 2004

Feature:Bad Behaviors

The potential influence of campaign dollars in hiring decisions is a growing concern

second of a two-part series. Last October, just days after the discovery of listening devices in Philadelphia Mayor John Street's office, among the extensive files seized by federal investigators were the city pension board's investment records. What investigators will, or hope to, find in those records is not known yet. However, what is known now is that some of the firms managing pension money for the city have been major contributors to political action committees controlled by attorney Ronald A White, whose office records also were seized in the federal probe, according to published reports.

The largest single contributor to White's political-action committees the past five years has been money manager John P McNiff, president of Longwood Investment Partners LP, according to The Philadelphia Daily News.

The city pension board is chaired by the city finance director, with eight other members, including representatives from the four city unions. The board generally approves any changes in money managers, with advice from an outside consultant who evaluates their performance, but the potential influence of campaign dollars in these hiring decisions is a growing concern.

Questionable motives do not always stain the bottom line, of course. Jim Hacking took over as executive director of the Minnesota State Employees Retirement Fund in the early 1990s, after his predecessor was charged with steering investments into companies with which he was involved. An investigation showed that the fund had taken a bath on some of those investments, Hacking notes. However, when he moved to Illinois State Universities Retirement System (SURS) in 1996, following a scandal there, he found that the fund still had managed to post a consistent record of beating its benchmark, net of fees—a record it continues to maintain. "It depends on the nature of the problem," Hacking says. In the Minnesota case, a top official was making investments for the wrong reasons. However, at Illinois SURS, the problem—officials reimbursing themselves out of the pension fund for political campaign contributions they had made—was not directly related to investment. In either case, he says, the solution is the same: "Increased oversight and better discipline both for the fiduciaries and the external oversight authorities like auditors and legislators. Then people think twice about doing something highly speculative. It raises the odds they're going to be found out."

The suspicion that some public fund trustees may favor donors with preferential treatment also can tarnish their ability to push the companies in which they invest to adopt better ethical behavior—efforts that are seen increasingly as part of their job. California Treasurer Phil Angelides and New York State Comptroller Alan Hevesi have been two of the country's most prominent corporate governance crusaders for several years, most recently at the forefront of institutional investors demanding reforms at the New York Stock Exchange. Both serve in states where it is not illegal for money managers to contribute to the campaigns of public officials with whom they do business, and both have taken generous advantage of the fact.

Angelides is an ex officio member of the $149 billion California Public Employees' Retirement System board. Early last year, CalPERS committed $760 million to two investment funds run by developer Ronald Burkle, who, with his wife, has contributed to the campaigns of Angelides and State Controller Kathleen Connell. Also a CalPERS board member, Connell successfully challenged in court efforts by the retirement system to impose tighter campaign contribution rules on its trustees in 1998. Another board member, San Francisco Mayor Willie Brown, has done legal work for a Burkle company.

Yet, of the three, only Connell recused herself from voting on CalPERS' investment with the developer. "All three should have recused themselves," says Jim Knox, executive director of California Common Cause, who has spoken out against board members accepting campaign contributions from state retirement system vendors.

Additionally, Angelides and Connell received contributions for their 2002 campaigns from Richard Wollack, a commercial real estate operator in whose Premier Pacific Vineyards fund CalPERS later invested $100 million. Angelides has told reporters that Wollack's activities as a campaign donor had nothing to do with CalPERS' investment.

Hevesi has been equally favored. A study of his campaign filings from last year, when the then-New York City comptroller ran for the state position, reveals that he received $7,200 from Marx Cazenave, whose Progress Investment Management Co. did business with the New York City Retirement Systems, the $112 billion State Common Retirement Fund, and $72 billion Teachers' Retirement Systems. Hevesi also received $20,000 from Lionel Pincus of investment firm Pincus Warburg, which also manages money for the city pension system.

However, the single biggest Hevesi donor last year—$110,000—was Milberg Weiss Bershad Mynes & Lerach. The New York-based law firm has become a prominent litigator against Enron and other companies that have been accused of deceiving their investors and pension plan participants and was hired by Hevesi's predecessor, Carl McCall—whose gubernatorial campaign received $200,000 from Milberg Weiss—to represent the state against Global Crossing. Hevesi also received a personal $2,000 donation from Leonard Barrack, senior partner of Philadelphia law firm Barrack, Rodos & Bacine, which now represents Hevesi as lead plaintiff in a suit against WorldCom.

With lawsuits against disgraced or slumping corporations a growing business, firms that represent public pension funds have become generous campaign donors. "It's the new frontier in pay-to-play," says R Scott Henderson, counsel at Boston's Bingham McCutchen and former executive director at the $30 billion Massachusetts Pension Reserves Investment Management (PRIM) Board.

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