Labor Relations Today : Pay to Play Lawyer & Attorney : Bribery, Campaign Contributions

The Securities and Exchange Commission (SEC) has given notice that it intends to take a very active role with respect to pay-to-play issues in the securities markets and has put the regulated community on notice that it expects private corporate compliance training to be well under way as well.

As we have recently reported, the SEC has announced its intentions to take a significantly more aggressive regulatory posture with regard to the confluence of campaign contributions and public investing. Just last week, the House Financial Services Committee saw to it that the SEC has the tools for the job when it voted to double the SEC’s budget and awarded the Commission significantly greater regulatory powers.

The Municipal Securities Rulemaking Board (“MSRB”) has also gotten into the act by recently announcing plans to file a rule change with the SEC to revise Rule G-37 to prohibit dealers from engaging in municipal securities business with issuers for two years if they make certain contributions to the political campaigns of officials of issuers. The proposed revision to Rule G-37 would require municipal securities dealers, their muni professionals, and political action committees to disclose the political contributions they make to bond ballot election campaigns.

Meanwhile, in a case which should get the attention of compliance officers everywhere, the SEC has recently notified Southwest Securities Inc. that it plans to recommend “administrative and cease-and-desist proceedings” against the company based, in part, on the company’s failure to conduct compliance training for its financial services staff. In that case, the SEC initiated the action as a result of the company’s alleged use of political donations to win municipal bank work. Southwest’s (now former) employee at the center of the allegations maintained that he only unintentionally exceeded the MSRB cap of $250 donation per election and that the SEC was “more concerned about Southwest Securities and their lack of compliance training of their bankers.” According to FINRA records, Southwest said the employee had failed to report political contributions as required by MSRB and the employee, in turn, faulted the company for failing to adequately inform him of the MSRB rules.

In another, very significant action, the SEC announced last week that banking powerhouse JPMorgan has entered into a multi-million dollar settlement with the agency over allegations that company employees made unlawful payments to friends of county officials. Under the settlement JPMorgan agreed to cancel interest-rate swap contracts between it and Jefferson County, Alabama, pay $75 million in civil fines and payments, and forfeit $647 million in claimed termination fees under the swap contracts.

The allegations giving rise to liabilities in excess of $722 million for JP Morgan ultimately arose from allegations concerning the actions of just two (now former) managing directors of JPMorgan. “The transactions were complex but the scheme was simple,” SEC Enforcement Director Robert Khuzami said in a statement. “Senior JP Morgan bankers made unlawful payments to win business and earn fees.”

These federal enforcement developments highlight the importance of instituting a proper compliance training program. Firms should review and revise policies, practices, and procedures to stay current on the most recent versions of the rules and regulations promulgated by the SEC and MSRB. The SEC has put the regulated community on notice that failure to implement proper compliance policies and train employees adequately can have significant negative consequences. By undertaking the effort to develop a comprehensive compliance program before problems arise, companies can better protect themselves from potential liability and its related, potentially catastrophic, costs and expenses. 

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Trends regarding the enactment of pay-to-play legislation remain remarkably consistent and robust nationwide. Typically, pay-to-play legislation is passed in the wake of a corruption scandal that befalls a high-ranking public official. In such an instance, the political pressure on governing bodies is so tremendous to act, that pay-to-play reform is inevitable.

This trend has just played itself out once again in Dallas, where the Dallas City Council just yesterday passed a series of Ethics reform measures in the wake of the corruption conviction of former Mayor Pro Tem Don Hill. The entirety of the legislation, which exceeds some 1300 pages, can be found here.

The ethics package contains numerous changes to existing lobbyist registration and disclosure requirements, City Council zoning powers and the disclosure of gifts to Council members. Most relevant to the pay-to-play space is that anyone bidding on a city contract is now prohibited from making donations during the bid period. Additionally, "major" zoning applicants can no longer make contributions to Council members during the window which begins on the date of public notice of the zoning case, and which ends 60 days after the zoning case is resolved. Such changes are not too surprising in this instance, given that the scandal involving Hill revolved around favorable treatment for developers.

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We at the Pay to Play Law Blog have received the following from Georgia Common Cause concerning their proposal for a Pay to Play ordinance for the City of Atlanta. We appreciate the submission and attach it herein in its entirety and unedited. The positions taken here are entirely those of Georgia Common Cause.

While we salute Mayor Franklin for her leadership in establishing a more ethical climate in City government, one of the things we see as little changed from past administrations is well-connected insiders continuing to show up in disproportionate numbers of the chosen few who are selected for work contracted by the City of Atlanta, and by the Atlanta airport.

While we can’t – and don’t want to try to - change human nature, we do believe in taking steps to increase trust that those whom we elect and employ to administer our procurement policies will not allow personal preferences to steer contracts to less qualified companies, and that our tax dollars will not be wasted. One reform we can implement, if we want to raise the level of confidence in how our tax money is spent, is to separate the offering up of campaign contributions from the awarding of contracts. That is what Pay-to-play reform is all about.

Pay-to-play has been at the heart of numerous news stories around the country within the past year: Alaska Senator Ted Stevens, Illinois Governor, Rod Blagojevich, The withdrawal of New Mexico Gov. Bill Richardson’s Cabinet nomination, and the collapse of the mortgage giants after Congress – which reaped millions from Wall Street in campaign cash – deregulated the industry and ignored repeated warnings of disaster. In August, New Jersey Governor Jon Corzine issued an order freezing the development approval process in cities and towns whose mayors have refused to resign despite being charged in a federal corruption probe involving bribes paid to local officials to speed up development projects.

Atlanta has had its share of scandals around pay-to-play. The Ronnie Thornton airport runway dirt deal dominated the headlines a few years ago. Airport advertiser Billy Corey and his Airport Services company continue to this day their five year court battle over alleged cronyism in the awarding of the 2002 advertising contract to Clear Channel Communications and their DBE partner Barbara Fouch, a close friend of Former Mayor Maynard Jackson, who has had a piece of the airport advertising business since 1981.

Rather than wait for a local scandal to prompt us, why not take steps to discourage practices that can lead to scandals? Let’s work together to find a way to make it work in the City of Atlanta, then make it work elsewhere in the state as well. Let’s start the process.

How does Pay to play reform work?
Common Cause has offered a model ordinance for consideration in the current Atlanta Mayoral and Council races. Our proposal is not structured as a campaign finance law change, but as a new condition of contracting. It’s quite a simple concept. People can either contribute freely to the campaigns of candidates, or they can qualify to receive contract work with the City of Atlanta. They cannot do both. All companies submitting bids and continuing contracting arrangements with the City would be asked to certify that they had not contributed more than a minimal amount to candidates for Mayor of City Council in the previous 12 months. Enforcement would rest with the contracting office. Companies or individuals violating the statute would be disqualified from further business with the City. To see a summary of the proposed reforms for Atlanta, click here. To read the model ordinance, click here.

We believe it’s time to take Atlanta to the next level of ethical government. No more inferences that those who play should pay. Let’s create a system where we are making sure that City contracts go to the best cost-effective service provider, not the best-connected company.

Bill Bozarth
Common Cause Georgia

We are grateful to Georgia Common Cause for their submission, and invite any interested commentary on the topic. Our personal views on Georgia Common Cause’s proposal were originally posted here.

In addition to the concerns addressed in our previous post, the regulated community should take notice - and contemplate the impact - of the proposed amendment to the City of Atlanta Procurement and Contracting Code. To be sure, the specter of campaign contributions to procurement officials from those seeking city contracts can be unseemly; but so can the prospect of a system in which only individuals wealthy enough to self-fund their campaigns have the means to seek elected office. In our view, public disclosure of contributions and transparency far better balance the competing ideals of democracy and procurement fraud prevention than outright contribution bans.

Moreover, the proposed City of Atlanta Procurement and Contracting Code as offered imposes considerably greater restriction than simply offering one a choice between contributing “freely to the campaigns of candidates, or [qualifying] to receive contract work with the City of Atlanta” as advertised by Georgia Common Cause. Rather, the proposal proffered seeks to disqualify any person or entity from obtaining - or keeping - a city contract, if that person or entity has

             made, directly or indirectly, any payment, gift or other contribution to or for the benefit 
             of any holder of elective office of the City of Atlanta or to any employee;

It is easy to contemplate how that language - crafted as broadly and vaguely as it is - could capture a great deal of seemingly innocent behavior with dire consequences. Imagine being the compliance office who has to tell your boss the CEO that her company’s life-blood contract with the City of Atlanta has been terminated for cause, and the company is liable to the City of Atlanta for all damages resulting from the termination, because the aggregate of all the contributions to a City of Atlanta politician by all of the company’s officers, directors, partners and salaried employees of the company exceeded $250, or because a competitor alleged that the company made a single “indirect” gift “for the benefit” of an employee of the City of Atlanta.

One can envision that birthday parties for City of Atlanta employees would be lonely places indeed.

Stefan Passantino, Esq.
Partner, McKenna Long & Aldridge LLP

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