SEC official says agency on the lookout for public-pension pay-to-play

SEC Director Andrew Ceresney has pay-to-play in mind — and has put public pensions on notice that the agency is watching.

The SEC is stepping up its coordination with the FBI and U.S. Attorney’s Office as it looks into pay-to-play schemes involving public pensions, Ceresney said at the Securities Enforcement Forum in Washington last week.

“Our sense is that where public officials are engaging in public corruption in other contexts — say, in hiring practices or awarding construction contracts — we may also find there is corruption in the awarding of underwriting business or investment advisory contracts for public pension funds,” he said. “I can’t say today what those efforts will yield, but we are doing all we can to shine light in this opaque area.”

A spokesman declined to say whether the SEC is currently investigating any new pay-to-play scheme. But it’s easy to see how private equity firms and their dealings with public pensions could draw SEC scrutiny.

The regulator has become increasingly aggressive in its enforcement of the industry in recent years, having notched large settlements from blue-chip firms like Apollo Global Management and Blackstone Group. And private equity also has a long history of ensnaring key pension officials in pay-to-play schemes.

In May, former CalPERS Chief Executive Federico Buenrostro was sentenced to 4 ½ years in prison for accepting bribes in exchange for influencing private equity commitments. Alan Hevesi, the former leader of New York’s state pension fund, served 20 months in prison after he was implicated in a similar scandal. New Mexico State Investment Council was collecting settlements relating to its PE pay-to-play scandal six years after it was unearthed in 2009.

While those cases represent extreme examples of malfeasance, the SEC has also targeted firms and outside contractors for allegedly using political contributions to influence investment decisions. In 2014, the SEC charged TL Ventures Inc with violating pay-to-play rules after a firm associate made political contributions to elected officials in Pennsylvania and Philadelphia. In his speech, Ceresney cited a recent $12 million settlement with State Street Bank and Trust Co after the the SEC found an executive facilitated illicit campaign contributions to win Ohio pension fund contracts. The firms neither admitted nor denied the SEC’s charges.

Those cases establish a standard to which public pensions and other institutions can hold their own investment managers, and many have implemented strict rules around campaign contributions to try and protect against outside influence.

Earlier this year, New Jersey State Investment Council warned CVC Capital Partners after Managing Partner Christopher Stadler inadvertently violated campaign-contribution rules. Even though New Jersey found Stadler’s mistake was relatively benign, according to New Jersey documents, the firm was “strongly admonished” by the council.

Stadler’s mistake is obviously a far cry from the crimes perpetrated by Buenrostro and Hevesi, who the industry hopes represent the rare bad apples among otherwise healthy dealings between public pension officials and private equity executives. But Ceresney’s comments hint at a new area of focus for the SEC, and all involved should be on notice.

Action Item: Check out the TL Ventures settlement here:

Andrew Ceresney (right), director of the SEC Enforcement Division, speaks as Preet Bharara, U.S. Attorney for the Southern District of New York, looks on during a news conference regarding Las Vegas sports bettor William “Billy” Walters and Dean Foods’ former chairman, Thomas Davis, both charged with insider trading, in New York City on May 19, 2016. Photo courtesy Reuters/Brendan McDermid