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Legacy Content / RULES OF THE GAME

Congress Should Heed Scandals In The States

Government Contracts Have Been A Source Of Trouble For Politicians From Mayors Up To Congress

August 3, 2009

Federal and state regulators are moving aggressively to rein in so-called pay-to-play abuses -- the cozy deals that involve kickbacks or campaign contributions given in return for lucrative government contracts -- in the wake of a string of such scandals in New York, New Jersey and elsewhere.

Investigations by New York Attorney General Andrew Cuomo (D) and the Securities and Exchange Commission have led to charges that numerous investment firms in several states made millions in illegal payments in exchange for the right to manage public pension funds.

Hoboken Mayor Peter Cammarano III (D) stepped down last week amid allegations that he took $25,000 from a federal informant in exchange for pledging to support a building project. Earlier this year, of course, there were the indictment of former Illinois Gov. Rod Blagojevich (D) on pay-to-play conspiracy charges and the federal investigation involving New Mexico Gov. Bill Richardson (D).


But even as officials at the SEC and in state legislatures take steps to end pay-to-play dealings, lawmakers on Capitol Hill are showing little interest in curbing contracting abuses. This despite a congressional ethics investigation involving the PMA Group, the now-defunct defense contractor, and growing White House impatience with spending bills loaded with defense industry earmarks.

"It seems that every time a governor goes to jail, we get a new pay-to-play law."
--Kenneth A. Gross

Recently the SEC voted unanimously to propose new rules aimed at ending pay-to-play practices involving the $2.2 trillion tied up in public pensions and investments. The public funds -- which include the pension plans that pay retirement benefits to government employees -- represent a growing market for investment advisers. The rules also target advisers angling to manage the $104 billion now invested in so-called 529 college savings accounts.

The SEC rules would bar investment advisers from managing those funds for two years after making campaign contributions to the elected officials in charge of selecting them. The rule would apply to certain executives and employees of the advisers, as well, and would also ban indirect campaign contributions through spouses, lawyers and affiliates.

The SEC proposed but never enacted a similar rule during the Clinton administration in 1999. It's modeled after an existing rule, known as the Municipal Securities Rulemaking Board's Rule G-37, that bars pay-to-play dealings in the municipal bonds market. That rule withstood a First Amendment challenge in federal court in 1995.

"It will affect an entire industry which is far-flung and heretofore unregulated," said Kenneth A. Gross, a partner at Skadden, Arps, Slate, Meagher & Flom, of the proposed SEC rule.

The SEC action comes on the heels of pay-to-play crackdowns in the states. Typically the state laws go beyond public pension advisers to capture government contractors of all stripes. Pay-to-play laws are in effect in 16 states, including California, Connecticut, Illinois, New Jersey, New Mexico and Ohio. They are pending in several more, including Massachusetts, North Carolina and Pennsylvania.

Connecticut enacted one of the earliest and strictest pay-to-play laws after Republican Gov. John G. Rowland resigned amid federal charges that he had received gifts from government contractors. "It seems that every time a governor goes to jail, we get a new pay-to-play law," quipped Gross.

Gross is advising his clients to pay close attention to state rules, which can involve harsh penalties. "It's absolutely critical for any company that does state or local contracting to implement a very sophisticated internal policy that pre-clears contributions by not only the company or its PAC, but also its employees and family members who are covered by these laws in those particular jurisdictions," he said.

Neither SEC nor state pay-to-play regulations have direct implications for Congress, but government contracting is getting plenty of scrutiny on Capitol Hill.

Under pressure from Rep. Jeff Flake, R-Ariz., the House Standards of Official Conduct (Ethics) Committee disclosed in June that it is investigating tens of millions in campaign contributions from the erstwhile PMA Group to lawmakers on Capitol Hill who steered hundreds of millions in contracts to the firm. Attention has focused on Rep. John Murtha, D-Pa., who chairs the House Appropriations Subcommittee on Defense, and on Rep. Peter Visclosky, D-Ind., a member of that panel. But it could spread to other lawmakers.

The Washington Post recently reported that a House military spending bill contains at least $6.9 billion in earmarks for defense industry programs that Defense Secretary Robert Gates says are not needed, prompting hints of a veto from White House officials. President Obama and Gates have pledged to overhaul wasteful government contracting practices and won a recent Senate vote to kill the controversial F-22 fighter-jet program.

But defense contracts, however wasteful, have fierce defenders on Capitol Hill, thanks in no small part to the defense industry's generous campaign contributions. It's a familiar arrangement that's an awful lot like the pay-to-play deals under fire at the SEC and in the states.

As SEC Chairman Mary L. Schapiro put it during the commission's July hearing to propose new rules, pay-to-play "refers to an often unspoken but well-understood arrangement." Increasingly, members of Congress appear to be the only ones who fail to see the connection.

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