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

By Stefan C. Passantino & Benjamin P. Keane

If it takes three times to make something a habit, it is safe to say that “pay-to-play” legislation in the State of California is getting to be a bit habitual.  For the third time in as many years, the California State Legislature has decided to ripple the “pay-to-play” regulatory waters by passing an “urgency” measure designed to clarify and modify the state’s existing restrictions on investment managers and investment placement agents who do business with California’s public employee pension funds, such as the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS).  The new piece of legislation, Senate Bill 398 (SB 398), was signed into law on October 9, 2011 by Governor Jerry Brown, and is designed to complement two other recently-passed bills regulating the activities of pension fund investment managers.

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As we anticipated for you here last November, Angelenos have indeed passed into law an ordinance establishing pay-to-play restrictions in the City of Angels. If ever one needed a sense of the public sentiment towards pay-to play regulation, one need only look at the 75% -25% margin by which the measure passed. As anticipated, the Measure targeted a single class of campaign donors (City contractors) who are perceived to make their living procuring contracts greased by campaign contributions. The full Resolution - which you can count on approximately 5 people having actually read - can be found here.

As proposed, the ballot measure put before the public read:

Shall the Charter be amended to (1) restrict campaign contributions and fundraising by bidders on certain City contracts; require increased disclosure for bidders; and provide for bans on future contracts for violators; and (2) build upon the city's voter-approved campaign trust fund, which provides limited public matching funds for qualified city candidates who agree to spending limits, by lifting the maximum balance in the fund while allowing the LA City Council by a two-thirds vote to not make the annual appropriation and temporarily transfer funds to meet City budgetary obligations in certain emergency conditions?

Language like that is difficult to vote against. The Devil, as they say, is in the details. Specifically, as passed, the measure restricts contractors holding or seeking City contracts in excess of $100,000 from making campaign contributions to, or fundraising for, City officials (including the Mayor, the City Attorney, the Controller or a member of the City Council) or candidates to those offices. Second, the ordinance lifts the maximum balance on the City’s public finance vehicle - the Campaign Trust Fund.

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One of the most prominent public displays of the once secretive world of pay-to-play in recent history surrounded the California Public Employees' Retirement System (affectionately referred to as “CalPERS”). As many will recall, CalPERS’ board of directors was subjected to significant scrutiny as a result of investigations in New York that demonstrated an all-too comfortable secret relationship between placement agents, investment firms, and public retirement systems. In California, CalPERS came to learn that several placement firms led by a former board member had received millions of dollars in service fees for helping certain investment firms land contracts to manage their funds.

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The Los Angeles City Council is expected to approve a recommendation to place a measure on the March 2011, Los Angeles municipal ballot banning bidders on LA contracts from making contributions or fundraising for City officials or candidates. The recommendation was made by a unanimous vote of the Los Angeles City Ethics Commission earlier this month.

Interestingly, the LA City Ethics Commission chose to enhance the bite of the proposed ban on bidder contributions by adding further recommended restrictions. The Commission recommended that the proposed ban:

• Apply the ban to bidders and their agents, their subcontractors, and their subcontractors’ agents and require bidders to disclose these agents and subcontractors in the bid documents. A common drafting, enforcement (and ultimately compliance) challenge with pay-to-play legislation surrounds the casting of the “agent” net. Here, when one examines the staff recommendations - which were ultimately adopted - the net is cast to ban contributions by to the following agents of bidders: the bidder’s Board chair; its president; its chief executive officer; its chief financial officer; its chief operating officer; any individual who holds an ownership interest of 20 percent or more; and any individual authorized in the bid to represent the bidder before the City. That 20 percent ownership piece becomes a pretty widely-cast net and one that has seen successful constitutional challenges in other jurisdictions.

• Apply the ban from the date a bidder submits a bid until one of the two following dates: a) For bidders who are not awarded the contract, the date the successful bidder signs the contract; and b) For bidders who are awarded the contract, the date 12 months after they sign the contract.

• Apply the ban to any contract (including a lease, franchise, permit, license, grant, amendment, change order, renewal or extension) that is required by law to be approved by an elected City official.

• Apply the ban to both personal contributions and fundraising activity and apply the same restrictions to lobbying entities that are applied to bidders. Again, without much fanfare, the proposed ban extends not just to “bidders” but also to any lobbyist. In our experience, lobbyists dance in the aisles when legislation such as this is passed and incumbents come to learn that their campaign coffers pay a steep price for a “throw-in” expansion such as this.

• Apply the ban to a City official who would solicit or receive contributions or fundraising proceeds from a person that the official knows or has reason to know is a person subject to the ban. Well, THAT should serve as a particular little compliance nightmare for officials and the unfortunate lawyers who work to keep them on the straight and narrow path. The opportunity for inadvertent violation and second-guessing is rampant with language such as this.

• Apply the ban to contributions to and fundraising for any City committee controlled by an elected City official or candidate for elected City office.

• Require invitations for bids to include notice of the ban. This provision will require bidders to certify that they will comply with and inform their agents and subcontractors of the ban.

• Prohibit persons who violate the ban from contracting with the City for four years following the violation. Ouch. That is a steep price to pay for an inadvertent violation. Does that mean I can buy a 20% ownership interest in a competitor and effectively put them out of business with a $10 contribution?

Interestingly, several news reports have noted that while “law firms, taxicab companies, airport concessionaires and construction firms doing business with the city get a special rule against padding the pockets of city officials”, one group is conspicuously absent from the “Rolls of the Regulated”: developers. The reason for the omission has nothing to do with the power or wealth of developers, said Yusef Robb, spokesman for City Council President Eric Garcetti, but rather because to include such a group would be “extremely complex”. 

I buy that. Do you? Let’s just chalk it up to bad timing that the same day that Robb’s quote hit the LA Times, this article ran as well.

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New legislation in California, if passed, would prohibit a person acting as a placement agent in connection with any political investment made by a state public retirement system, unless the person is registered as a lobbyist and is in full compliance with California’s Political Reform Act of 1974 as that act applies to lobbyists. California’s law would not be as restrictive as New York, which has an outright ban on placement agents in this area.

The bill defines a placement agent as: “any person or entity hired, engaged, or retained by, or acting on behalf of, an external manager, or on behalf of another placement agent, as a finder, solicitor, marketer, consultant, broker, or other intermediary to raise money or investment from, or to obtain access to, a public retirement system in California, directly or indirectly, including, without limitation, through an investment vehicle.”

There is an exemption for employees of external managers who spends at least one-third of their time managing the assets of their employer.

The bill is sponsored by the California Public Employees’ Retirement System (CalPERS), state Controller John Chiang and Treasurer Bill Lockyer. Mr. Lockyer says “This legislation will help protect the integrity of those decisions by increasing transparency and reducing the ability of high-paid middlemen to use money and gifts to win favorable treatment,” he says. “And it will help make sure the interests of workers, retirees and taxpayers remain paramount.”

“Our legislation puts the interests of taxpayers, public pension fund members, and retirees first,” Chiang said. “Subjecting placement agents to the same ethics rules as lobbyists will help safeguard public pension fund investments from individuals seeking questionable influence.”

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