Donations to State Treasurer Raise Red Flags

A similar version of this article originally appeared in the Fayetteville Observer

Janet Cowell’s primary responsibility as State Treasurer is to oversee the pension fund for retired North Carolina teachers and state employees. So why does her campaign receive so many contributions from far-away states like New York, Pennsylvania and California?

Didn’t Cowell learn anything from her predecessor, Richard Moore, who got in hot water due to the appearance of “pay to play” because he took campaign donations from out-of-state money managers?

Recent developments suggest Cowell has merely replaced one potential form of pay to play with another.

For the specter of such schemes arises in the aftermath of the losses suffered by the state pension fund due to its investment in the ill-fated Facebook IPO. For certain New York-based friends-of-Janet, however, the pension fund’s loss presents an opportunity to cash in.

As you may already know, the pension fund is aggressively pursuing lead plaintiff status in one of many class action lawsuits against Facebook and its IPO underwriters. Which leads us to the issue of the pension fund’s choices to represent the fund in this lawsuit – a position if attained would be quite lucrative. Bernstein Litowitz Berger & Grossmann (Bernstein) is a New York based law firm specializing in securities class action suits. Labaton Sucharow (Laboton) is also based in New York and has the same specialization.

Something else they have in common: Both are donors to Janet Cowell.

Indeed, according to state records, employees of Bernstein have donated nearly $75,000 to Cowell since 2008. For their part, Labaton employees are more recent friends-of-Janet, donating $5,000 last fall. Not coincidentally, Labaton employees have also donated thousands to Arkansas State Treasurer Martha Shoffner – the Arkansas Teacher Retirement System is one of the primary supporting plaintiffs in the class action suit North Carolina’s pension fund is heading up.

This cozy relationship between securities law firms and major public pension fund managers like Cowell is part of a growing national trend, raising questions of political pay-to-play schemes so many citizens have become weary of.

As far back as 2004, Forbes magazine began exposing this development, dubbing it the “class action industrial complex.” Becoming the lead counsel representing huge public pension funds can reap significant paydays for law firms, and these firms have become especially generous contributors to elected pension fund managers across the country.

Examples of pay-to-play in the public pension class action “industrial complex” are numerous, and Cowell’s choices to represent North Carolina’s pension fund are front and center in many of them.

For instance, Bernstein has been particularly active in Louisiana. The firm had contributed more than $90,000 to Louisiana politicians and in turn represented various state public pension funds in at least 15 class actions at the time of the Forbes article. Moreover, in one notorious case Bernstein (while partnering with another firm) attempted to bill major public pension funds from New York and California more than $10,000 an hour for their services in another class action. H. Carl McCall, who at the time was state comptroller and the sole trustee of the New York State fund, just so happened to be the recipient of $140,000 in campaign contributions from the two class action firms representing his fund.

Interestingly, one Bernstein lawyer singled out in the 2004 Forbes article because he has ”used political ties to turn Louisiana’s pension funds into a profit center for his New York law firm, Bernstein Litowitz” is a gentleman by the name of Anthony Gelderman III. Cowell’s campaign records show that Cowell has made multiple trips to New Orleans since 2008, compensated in part by “in-kind” donations from Gelderman.

For their part, Labaton has been busy profiting off close relationships with public pension fund managers as well.

For instance, from 2008 to 2010, Labaton donated at least $125,000 to Ohio’s state Democratic Party (with no donations to the state’s Republican party). Their generosity was rewarded in a big way. In July 2011, they were lead counsel in one of the largest class action settlements in history, representing the Attorney General’s Office and three major Ohio public pension funds. The Ohio Attorney General at the time, Richard Cordray, coincidentally is a Democrat. As an interesting aside, Cordray was appointed by President Obama last year to head the federal Consumer Financial Protection Bureau.

These law firms have become financial ambulance-chasers of sorts, often sniffing out possible suits on behalf of funds in which the fund managers themselves are unaware of any wrongdoing. According to a quote in the Forbes article, “Even some pension fund officials admit the lawyers, not the funds, guide this class action assault. ‘We don’t go to them, they come to us. They’re simply looking for lead plaintiffs,’ says William Reeves, general counsel to Teachers’ Retirement System of Louisiana, a Bernstein Litowitz client in eight recent suits.”

Such cases involving the appearance of pay to play between securities firms and public pension fund managers have become so prevalent, in fact, that in 2009 Senator Bob Bennett of Utah, in his role on the U.S. Senate Banking Committee, asked the SEC to investigate securities law firms, because “Pay-to-play by law firms … pose serious potential conflicts of interest that can harm the pension fund retirees who have spent their careers in public service jobs.” Unfortunately, the SEC didn’t take up the challenge.

Other big players in the pay to play scheme with public pensions include New York firms Wolf Popper, Kaplan Fox & Kilsheimer and Pennsylvania-based Shiffrin, Barraway, Topaz & Kessler. Collectively, these three firms donated nearly $46,000 to Cowell since 2008.

Records from the National Institute on Money in State Politics show that Cowell’s 2012 campaign has received more money from out of state sources than from North Carolina backers, and in 2008 she received $225,000 in New York-based contributions alone. Why so much financial support from far-away places?

When a politician is empowered with control over such a large pot of money, this is the inevitable result: interest groups will donate money in hopes of getting a slice of the pie. In this case, it seems that Cowell is all too happy to accept donations from out of state law firms, and in turn the law firms hope to be selected in the event North Carolina’s pension fund engages in class action law suits. The result: Cowell’s campaign coffers swell and the law firms profit handsomely.

It doesn’t have to be that way, however. Shifting state employees into a 401(k)-type retirement plan would mean employees would own and control their own retirement funds.

Perhaps North Carolina is ready to take the politics out of the state pension. Janet Cowell isn’t the first to leverage the State Treasurer’s control over the state pension for possible pay to play schemes, but with a sensible transition to 401(k) style retirement plan, she could be the last.

Brian Balfour is Director of Policy at the Civitas Institute in Raleigh (www.nccivitas.org)