Pay to Play Law Blog : Pay to Play Lawyer & Attorney : Bribery, Campaign Contributions

Reacting to investigations that have followed the administration of former Governor Mike Easley, the North Carolina legislature recently passed a sweeping package of ethics reform. The text of the bill, which was passed in the waning hours of the General Assembly, can be found here.

Specifically, the new legislation strengthens fines for illegal campaign contributions, which were reportedly not uncommon in the Tarheel state due to weak penalties.  Additionally, the legislation subjects board and commission members, as well as state employees, to more robust disclosure requirements. As is typical in the area of ethics reform, all areas have been subjects of contention in recent North Carolina ethics investigations.

Notably, the legislation did not include "pay to play" provisions, which were advocated for by some in North Carolina. Rather, the legislation establishes a commission to study whether pay-to-play legislation is needed in North Carolina, as well as the scope of any such provisions.

Given the political climate in North Carolina at this juncture, and the likelihood that investigations will continue in the ethics realm, it is likely that the North Carolina legislature will readdress the issue in 2011. Of course, we at the pay-to-play law blog will continue to monitor the developments on the ground in Raleigh.

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Several efforts are underway at the state and local levels to re-examine New Jersey’s stringent pay-to-play laws. This is probably a good development. Without question, New Jersey’s pay-to-play laws, put into effect in 2006, are considered by most in the regulated community to be among the most intrusive and confusing in the country. That is not a good combination for those doing business in the state or the lawyers seeking to advise them. Fortunately, it appears that the New Jersey Election Law Enforcement Commission (ELEC) agrees with that assessment and has announced its intention to support revisions to the law.

In its July newsletter, ELEC’s Commission Chair Jerry Fitzgerald English announced ELEC’s plans “to prioritize proposals for legislative reforms that are designed to improve the regulation of campaign financing, lobbying, and pay-to-play.” While recognizing that legal challenges pending nationally will have an influence on New Jersey’s actions, ELEC proposes significant changes to the State’s pay-to-play law.

ELEC’s first proposal, which almost makes too much sense to originate from government, is to revise the state’s pay-to-play laws to ensure that a single law applies at both the State and municipal level. Currently, local municipalities are free to pass a quilt-like patchwork of ordinances; all most none of which bear any relationship to the others. As ELEC points out, in addition to state law, over 50 local ordinances and executive orders also control local contracting and contribution rules. Such a regulatory scheme not only makes compliance exceedingly difficult for major vendors, but fosters costly and discouraging legal challenges with the passage of each new ordinance (this reaction to the Borough of Dumont’s new pay-to-play ordinance being only the most recent example).

Of the various changes proposed, probably the most significant is ELEC’s proposal is to remove the authority of county and municipal governments to circumvent state procurement laws by publicly advertising bids (referred to as the State’s “Fair and Open” provision). These changes, in addition to the ubiquitous calls for increased “transparency” through lower filing thresholds combined with a sensible call for increased contribution limits to provide defense against inevitable First Amendment challenge, appear to indicate that New Jersey is on the road toward common sense reforms.

Consider this blog among those supporting ELEC’s proposals.

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On Wednesday, June 29, the Securities and Exchange Commission unanimously approved the final text of a new rule under the Investment Advisers Act of 1940 directed at preventing pay to play practices by investment advisers. In response to 250 comment letters, with divergent views on the issue, the Commission revised certain provisions of the rule it proposed last year but largely kept intact its initial proposal of regulations designed to ensure that investment advisors are prohibited from using campaign contributions to steer municipal investment business. Oddly enough, the Commission received no comment letters from the class of plan beneficiaries that it sought to protect with the proposed rule, although two public interest groups strongly supported the proposed revisions.

The new rule has three key elements:

1) It prohibits investment advisors from providing advisory services for compensation—either directly or through a pooled investment vehicle—for two years, if the advisor or certain of its executives or employees have made a political contribution to an elected official in a position to influence the selection of the advisor;

2) It prohibits advisory firms and certain executives and employees from soliciting or coordinating campaign contributions from others (a practice referred to as “bundling”) for any elected official in a position to influence the selection of the adviser. It also prohibits solicitation and coordination of payments to political parties in the state or locality where the adviser is seeking business; and

3) It prohibits investment advisors from paying third parties, such as placement agents, from soliciting a government client on behalf of the investment adviser, unless that third party is an SEC-registered investment advisor or broker/dealer subject to similar pay to play restrictions.

Finally, the rule contains a catch-all, “don’t let the lawyers find a loophole” provision, which prohibits acts done indirectly, which if done directly, would result in a violation of the rule (such as old favorites like funneling contributions through an investment adviser’s attorneys, spouses or affiliated companies).

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After almost a year (and countless scandals with related enforcement actions later), it appears the SEC will issue its much loved, hated and debated pay-to-play rule. The SEC has announced the subject matter to be discussed at its open meeting on June 30, 2010: “The Commission will consider whether to adopt a new rule and related rule amendments under the Investment Advisers Act of 1940 to address ‘pay-to-play’ practices by investment advisers. The new rule is designed to prohibit advisers from seeking to influence the award of advisory contracts by public entities by making or soliciting political contributions to or for those officials who are in a position to influence the awards.”

On August 3, 2009, the SEC proposed measures at the federal level intended to eliminate, or at least curtail, “pay-to-play” practices. The proposed pay-to-play rule was published in the Federal Register on August 7, 2009, and the SEC received 250 comment letters on the proposal through October 6, 2009. As currently drafted, the prohibitions on providing investment advisory services and payments to solicit, in each case as described in the proposed rule and outlined in our prior blog entry, arise only from contributions made on or after the effective date of the rule. The current draft rule also contains a prohibition on placement agents acting as intermediaries between public pension funds and advisers. The majority of the comment letters were critical of the ban on placement agents. However, the SEC has indicated that the rule may be revised to reflect public comment. To that end, in April 2010, the SEC engaged FINRA to craft rules for registered broker-dealers when acting as a placement agent soliciting investments from government investors. Please click here for further information on this issue.  As Doug Cornelius, Chief Compliance Officer at Beacon Capital Partners has speculated: “That would make it likely that placement agents will not be banned, but merely subject to some additional regulatory requirements.”

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Recent developments have served to transform this blog into something more of a “crime report” than originally intended as state and federal regulators have increasingly turned to highly publicized criminal prosecutions as a means of limiting pay to play activities. Most recently, New York’s Attorney General felt compelled to file legal pleadings in Manhattan State Court rebutting the assertion that there is nothing inherently wrong with using political connections and favors to secure state contracts because “everybody does it”.

In the public corruption case against Hank Morris, former advisor to State Comptroller Alan Hevesi, the State of New York observed :

“Business as usual” is not a defense to fraud, and “everybody does it” is not a defense to public corruption. It is true that fraud and corruption in politics have existed from the beginning of time. That is not, however, a reason to ignore them; to the contrary, we must zealously root them out. The fact that fraud and corruption may be rampant dies not cloak wrongdoers with impunity."

(Affirmation and Memorandum of Law in response to Defendant’s Omnibus Motion, p.2)

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In early June 2010, Greene County, Ohio filed suit against the Ohio Secretary of State in an effort to ensure that Ohio’s pay to play statue can not be enforced anywhere in the state. The Statute in question, referred to as “HB 694”, purported to ban the award of public contracts to those who had contributed $1,000 or more to those with the power to award the contract.

In April of 2009, the Tenth Appellate District of the Ohio Court of Appeals issued an order finding Ohio’s pay to play law to be invalid due to the procedure used to enact it. Because that opinion was never appealed to the Ohio Supreme Court, the enforceability of HB 694 remained in question in every appellate district of Ohio other than the Tenth. It is this uncertainty which has led to the filing of this most recent lawsuit by the Greene County Board of County Commissioners.

While unlikely to reach the constitutional merits of HB 694, this most recent litigation can be added to a growing list of jurisdictions that have seen their legislative efforts to impose restrictions on contributions fail on the courthouse steps.

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It just wouldn’t be right to have a pay to play blog and not post a comment about recent developments in the grand daddy of all pay to play trials: United States v. Blagojevich. According to recent AP reports, the Governor’s former top aid testified today that it was concern over Illinois’ recent pay to play legislation that compelled Governor Blagojevich to make a deal to sell President Obama’s Senate seat. As we reported here, Governor Blagojevich had vetoed Illinois legislation banning state contractors from making campaign contributions to the politicians who controlled those contracts and had an interest in ensuring that the Illinois State Senate did not override his veto.

According to the testimony of Alonzo Monk yesterday, Governor Blagojevich was so sufficiently concerned about the impact the new legislation would have on his fundraising efforts that he reached a deal with former state Senate President Emil Jones to let the veto stand in exchange for his agreement to appoint a state legislator to the US Senate seat. Ultimately, as we know, the deal fell apart when then President Obama urged Jones to action on the veto and US Attorney Fitzgerald revealed that he had been listening in on Blagojevich’s dealings.

And they said pay to play law was boring!

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As we have previously analyzed on the blog, the recent U.S. Supreme Court decision in Citizens United v. FEC has sparked both election law commentary over the limits of government efforts to restrict political speech as well as a much celebrated one-way fight between branches of government at the State of the Union Address. Now, the third branch of government is about to get in on the act as Senator Charles Schumer (D-N.Y.) and Congressman Chris Van Hollen (D-Md.) are set to unveil “responsive” federal legislation containing federal pay-to-play prohibitions with the apparent support of at least one Republican, Rep. Mike Castle (R-Del.). This legislation was recently released and is called the "DISCLOSE ACT". Please click here to view the summary.

The Citizens United opinion expressly recognized the First Amendment rights of corporations and labor unions to participate in the political process through the funding of independent communications expressly advocating the election or defeat of clearly identified candidates. Couched as it was in Constitutional principles, there are limits to what Congress can do to overturn the opinion. The Senate and House Democratic leadership appears to have concluded that if the prohibition of such speech is unconstitutional, the preferred response will be to require disclosure of corporate and union independent expenditures to the FEC and to shareholders and further to require corporate CEOs to appear on expenditures with the same “stand by your ad” messages we have learned to love in campaign advertising. The bill will also seek to impose additional limitations on the abilities of foreign individuals and companies to influence political speech by U.S. corporations.

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A new report issued by the New Jersey Election Law Enforcement Commission (ELEC) is being cited as evidence that New Jersey's pay-to-play laws, which are undoubtedly amongst the most robust in the nation, are reducing the amount of money entering New Jersey politics.

Specifically, ELEC's analysis of contributions to candidates participating in the upcoming May 11 municipal elections in New Jersey indicate that total contributions are down 19% from fundraising totals at the same point four years ago. While current economic conditions would undoubtedly seem to have had some impact on these figures, a close examination of all campaign contributions in New Jersey indicates that pay-to-play laws are playing a significant factor in the reduced fundraising totals.

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