Pay to play beyond Goldman Sachs

By Cate Long
September 28, 2012

The SEC caught a big fish in muniland that was clearly breaking the “pay-to-play” rules. Pay-to-play is when municipal bond underwriters give contributions to politicians to win underwriting business. Reuters has the story:

Goldman Sachs Group Inc will pay more than $14 million to settle federal and state charges after it violated “pay-to-play” rules, in a case involving campaign contributions to former Massachusetts gubernatorial candidate Timothy Cahill.

Neil Morrison, a former vice president in Goldman’s Boston office, worked extensively on Cahill’s 2010 campaign while also soliciting underwriting business from the Massachusetts treasurer’s office, the Securities and Exchange Commission said. Cahill at the time was Massachusetts state treasurer.

It appears that Goldman Sachs hired the former deputy treasurer of Massachusetts, Neil Morrison, who then proceeded to use his time at Goldman and the firm’s resources to help elect his former boss as governor. The quid pro quo to Morrison and Goldman was the state would direct lucrative underwriting to Goldman Sachs. The SEC described the case as its first “pay-to-play” case involving contributions other than cash.

Goldman Sachs paid a massive fine. The Financial Times picks up the story:

“Morrison’s work for Cahill’s campaign during his Goldman Sachs’ work hours was remarkable in its breadth,” the SEC said in its order.

The SEC alleged that from July 2008 to October 2010 Mr Morrison made both personal cash payments and in-kind contributions, including fundraising, writing campaign materials, attending Mr Cahill’s press conferences and approving the hiring of campaign personnel as well as their salaries.

Mr Cahill was in a position to influence which banks were hired to underwrite debt for several municipalities. During the period, according to the settlement documents, Goldman’s underwriting business increased with Massachusetts, with the bank winning the lead underwriter position for three of 11 transactions it worked on for the state’s Housing Finance Agency.

This story makes you wonder if Goldman Sachs either doesn’t supervise its employees or just looked the other way in this case. Goldman, like many other Wall Street firms, has a habit of hiring former regulators and politicians. Former SEC Chairman Arthur Levitt serves as a senior policy advisor for the firm and the former U.S. Senator from New Hampshire, Judd Gregg, serves as an international advisor.

The Goldman case may be a shining example of the revolving door between government and Wall Street, but it is also unique because it did not involve direct cash payments from someone working at a bond underwriter. There have been several previous high profile pay-to-play cases, most specifically Jefferson County, Alabama which is now bankrupt. From the AP in 2009:

JPMorgan Chase (JPM) has agreed to a settlement worth more than $700 million over federal regulators’ charges that it made unlawful payments to friends of public officials to win municipal bond business in Jefferson County, Ala.

JP Morgan was involved in another precedent setting “pay-to-play” case when their vice-chairman, who did not directly do muni underwriting work, contributed $1,000 to former California treasurer Phil Angelides and rounded up another $8,000 for the campaign. According to a report by the law firm Covington and Burling, the SEC issued a Section 21(a) investigation report on the case that concluded:

The assessment of whether the contributions and subsequent securities transactions violated Rule G-37 turned on the Vice Chairman’s functional responsibilities and actions, as they related to JPMSI.

The Vice Chairman was responsible for JP Morgan Chase’s fully integrated investment banking businesses, which included JPMSI’s broker-dealer activities.  By virtue of his membership on JP Morgan Chase’s executive committee, the Vice Chairman helped oversee the strategy and functions of the investment bank’s entire business.  Additionally, among other things, he could (i) hire and fire employees of JPMSI, (ii) resolve disputes involving JPMSI, and (iii) oversee JPMSI’s municipal finance transactions.  Beyond this authority, he also played an active role in marketing and promoting JPMSI’s public finance services.  No other JP Morgan Chase officer had similar responsibility with respect to JPMSI’s business.

The SEC settlement with Goldman Sachs and the past cases with JP Morgan suggest a general laxity among municipal bond dealers who try and influence politicians to get lucrative underwriting work. The cases brought by the SEC suggest a fairly heavy line on what pay-to-play actions underwriters can and can’t do. Kudos to the SEC for this groundbreaking settlement.

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