CALIFORNIA

Dan Weikel, Mark Landsbaum & Eric Lichtblau, Donations to O.C. Supervisor Said to Be Influential, L.A. Times (Jan. 22, 1995).

Roger Stanton was a key decisionmaker when it comes to doling out business to financial advisers to Orange County. As Chairman of the County Board of Supervisors and Orange County Transportation Board, Stanton was in a position to influence the selection of underwriters, advisers and attorneys for hundreds of millions of dollars in connection with bond work.

Not surprisingly, Stanton has received more in political contributions from the public finance community than any other member of the Board. Even his assistant, Robert Richardson, who also an elected Santa Ana city councilman, has received more campaign contributions than some of Stanton's colleagues.

Financial advisers and former Board staffers described a system in which making campaign contributions to Stanton, Richardson and their allies were a prerequisite to being considered for County bond work.

One financial adviser, after being warned that competing for County business without making the required contributions, submitted his name for advisory work anyway. During the interview, county officials never even asked Ashburn how much he charged.

According to the Times, the financial community paid Stanton at least $19,243 over the preceding five years; Richardson, $12,368; Supervisor Gaddi Vasquez, $15,225; Supervisor William Steiner, $10,300; Supervisor Harriett Weider, $13,460; and Supervisor Thomas Riley, $12,388. The Times' analysis showed that the more generous political contributors in the financial community were given the largest share of county business.

One example of the inner workings of the pay to play system is how Jeffrey Leifer, a Santa Monica financial adviser, was hired as the financial adviser for a county bond issue. Leifer, who contributed to Board Supervisors and hosted a fundraiser for Richardson, did not even make the final list of candidates because the county staff felt his proposal did not measure up to those of his competitors.

A county staff person told the Times that she was ordered to add Leifer to the list. The order, she said, came from Stanton's office, and Stanton later made the decision to hire Leifer.

Another county staff member said that Stanton influenced which underwriters, financial advisers, and attorneys received bond work even when he was not the supervisor who would customarily make the pick. Typically, the supervisor from district that was issuing the bonds would make the choice, but if Stanton's office "felt strongly about someone they would let you know," said the staff member.

Stanton, Richardson and others denied that contributions played any role in the selection of financial advisers, underwriters and attorneys. Nonetheless, Stanton appears to recognize the impropriety of accepting money from the same people who then apply to the Board to do bond work. Stanton stated that he supports limits on campaign contributions from the financial community.

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California Pension Fund Weathers Investment Controversy, National Mortgage News (June 24, 1996).

When a consultant recommended that the California Public Employees Retirement System (CalPERS) fire several real estate advisory firms for poor performance, California's state controller Kathleen Connell, a CalPERS board member, leapt to the defense of one of the firms.

Connell claimed that TCW Realty Investors was being made a scapegoat of a lagging real estate market, yet from 1990 to 1995 TCW ranked 11th of 13 firms that had been managing real estate investments for CalPERS, producing a meager 3.2% annual return. In 1995 alone, TCW collected $2.4 million for its efforts.

It appears that Connell was a less than objective critic. She had accepted nearly $24,000 in political contributions from TCW, $9,000 of which came during Connell's first year in office. As a result of the debate over the consultant's report, the board decided not to fire the real estate firms, but to shift the decision to CalPERS' professional staff.

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Shawn Neidorf, Pathway Unseats Abbott at CalSTRS: Le Bon Contributes $20,000 to California State Controller, Venture Capital Journal (May 1, 1997).

In December 1996, Douglas Le Bon, a Pathway Capital Management Principal, made his third political contribution in two years to California State Controller Kathleen Connell, a voting member of CalSTRS' board. The following March, CalSTRS replaced its alternative assets investment adviser, Abbott Capital Management, with Pathway Capital Management.

Private equity consultants considered Abbott a shoe-in to win the advisory contract with CalSTRS, so they did not both responding to a request for a proposal issued in 1996. CalSTRS apparently had other plans, as it reissued the RFP, and CalSTRS entreated firms to apply.

What the consultants might not have known is that Le Bon's contributions to Connell's campaign equaled $5,000 in 1994, $5,000 in 1995, and $10,000 in 1996, the last contribution coming just a few months before Pathway won the new contract.

Connell abstained from the vote, but nevertheless was outspoken about her dim view of Abbott's investment record. Jim Flanigan, CalSTRS' Chief Investment Officer, disputed Connell's position, and appeared to be about to follow Abbott out the door. No one else applied for Flanigan's job when his contract expired, so CalSTRS asked again sought applicants through an executive search firm.

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Charles Gasparino, 'Pay-to-Play' in Public Pension Funds To Be Examined by California Senate, Wall Street Journal (July 21, 1997)

A California Senate Committee decided to hold hearings to examine pay-to-play abuses in the public-retirement fund business, and to call the CEOs of CalPERS and CalSTRS.

The hearings were prompted in part by a letter written that Jim Flanigan sent to SEC Chairman Arthur Levitt charging that politicians who oversee state retirement funds often pressure staffers to make investment decisions for political reasons. Flanigan, who was dismissed as Chief Investment Officer of CalSTRS, claimed that California State Controller Kathleen Connell, a CalSTRS board member, solicited contributions from firms that do business with CalSTRS.

CalPERS, with $118 billion in assets, and CalSTRS, with $75 billion in assets, are the nation's first and third largest public pension funds. Across the country, a growing number of public officials are coming under scrutiny for soliciting campaign contributions from the same firms that they select to manage public pension assets.

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Paul Jacobs, Donations to Pension Officials Scrutinized: Connell, Fong Say They Are Not Influenced by Contributions from Firms Doing Business with State Systems, L.A. Times (Aug. 21, 1997)

California State Controller Kathleen Connell and California State Treasurer Matt Fong, both of whom sit on the boards of CalPERS and CalSTRS, received at least $500,000 in campaign contributions from firms doing business with the pension funds.

And both claim that the contributions had no effect on their decisions made on behalf of the pension funds, noting that they both had, on occasion, actually voted against awarding business to contributors. Fong said it was "certainly" proper for him to cast votes on pension-fund investments involving contributors.

The CalPERS and CalSTRS boards, both of which include elected officials, have broad authority to hire and fire financial advisors, yet state law permits politicians to collect money from those who do business with the state and does not require elected officials to declare a conflict of interest and abstain from votes affecting their contributors.

Robert Stern, a leading campaign finance reformer, co-director of the Center for Governmental Studies, and co-author of Proposition 208, which starting in 1997 set limits on political contributions, argued that "money rarely buys a vote, but a contribution buys something. Or why else would [the business interests] be giving? If you are doing business with the agency, you want to maintain a good relationship with the agency. It is like an insurance policy, because there may be a crisis and you may have to have access to the official."

"The ultimate obligation of these boards is to safeguard pension funds for retirees, and the only consideration that should go into investment decisions is what will bring the best and most secure return for the fund," said state senator Adam Schiff, a Burbank Democrat who is heading a Senate probe on pay-to-play practices.

When board members solicit campaign contributions, it creates a dilemma for companies with pension fund business. "If you don't contribute, you're subject to the concern that others will make contributions."

Executives of Lombard/Pacific Partners and their families had no compunctions coughing up $32,000 to Fong since 1994. In 1996, CalPERS voted to invest an additional $250 million in Lombard. The investment followed earlier commitments of $100 million to partnerships that included Lombard Investments. Lawrence Hull, a Lombard consultant who frequently invited Lombard employees to Fong fundraisers, said "we would do everything we could to support him. Our family is close to his."

Douglas Le Bon contributed $20,000 to Connell in the three years immediately after his firm, Pathway Capital Management, was selected to replace Abbott Capital Management, as a CalSTRS advisor. Connell abstained from the vote on Pathway, but attended Pathway presentation and asked a number of questions.

In 1995, CalSTRS voted to invest $150 million in a real estate investment fund arranged by Colony Capital, executives of which contributed $20,000 to Connell, and $9,500 to Fong, between 1994 and 1996. Connell said she opposed the investment; Fong abstained.

Pension Funds and Political Money
Advisory Firm
Contributions to Connell
Contributions to Fong
Business Awarded to Firm
Leonard Green & Partners
$35,000
$0
$75 million investment from CalPERS
Triumph Capital Group
$9,000
$28,250
$60 million investment from CalPERS
Levine Leichtman Capital
$33,000$0
$100 million investment from CalPERS
Lombard Investments
$0
$32,000
$350 million investment from CalPERS
Colony Capital
$20,000
$9,500
$150 million investment from CalSTRS
Cox, Castle & Nicholson
$11,000
$15,000
Law firm represents CalSTRS
Freeman Spogli & Co.
$7,000
$19,000
$75 million investment from CalPERS; $60 million investment from CalSTRS
TCW Realty Advisors
$17,500
$5,000
Real estate advisors to CalPERS
Hellman & Friedman
$5,000
$17,000
$100 million investment from CalPERS
Pathway Financial
$20,000
$0
$2.9 million advisory fees from CalSTRS

Source: 1993-1997 filed campaign reports; CalPERS and CalSTRS financial reports (contributions are from firms, and their officers, employees, consultants and relatives)

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Senate Panel Eyes Public Pension Funds' Decision-making, The Associated Press Political Service (Aug. 25, 1997)

At hearings before a panel of the California Senate, representatives of the California Public Employees Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS), two of the nation's three largest public pension funds, acknowledged that investment decisions are often made in private, and that recorded roll calls are rarely taken.

They also admitted that decisions made in executive session may not be disclosed immediately, but that the public ultimately is informed of actions through the publication of minutes, often weeks later.

Some argued that confidentiality was necessary to protect sensitive negotiations and minimize financial risk.

The hearings were held in the wake of revelations of hundreds of thousands of dollars in campaign contributions being paid to Kathleen Connell and Matt Fong, both of whom serve on the boards of CalPERS and CalSTRS.

Both Connell and Fong admit they took contributions, but insist that they have done nothing wrong. Together, CalPERS and CalSTRS pay more than $150 annually to outside investment managers and consultants, many of whom made large and repeated contributions to Connell's and Fong's campaigns.

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Paul Jacobs, Investment Raises Questions about State Pension Fund, L.A. Times (Sep. 16, 1997)

The first investment with Hicks came in 1994, when Villalobos was a CalPERS board member. The board invested $100 million with the firm on the recommendation of Pacific Corporate Group, a consulting firm headed by Christopher Bower. Bower later sold a yacht to Thomas Hicks, chairman and CEO of Hicks, Muse, for $300,000 -- $45,000 more than Bower had paid two years earlier.

Hicks said in an interview that he did not see the potential for a conflict of interest when he bought the yacht sight unseen, after having a relative inspect it.

When board staff members learned about the sale the next year, they questioned the appearance of a conflict of interest, but Bower was cleared on technicalities.

Bower surfaced again when Hicks, Muse was awarded a second $100 million investment by the board. Remarkably, the board again hired Pacific Corporate Group, which not surprisingly recommended the investment. A consultant that later replaced Pacific Corporate Group advised against the investment.

This time, however, CalPERS professional investment staff was opposed, and did not take the investment to the board for approval. Hicks, Muse would have none of it, and hired Villalobos, a former deputy to L.A. mayor Richard Riordan, to convince the board's political appointees to reverse the staff's decision.

Villalobos lobbied 10 of the 13 members of the board, and enlisted the help of state senator Richard Polanco, who himself asked two elected officials on the board to support Hicks, Muse.

Villalobos, who years earlier had declared personal bankruptcy and was sued by a casino to recover gambling debts, was paid between $750,000 and $2.5 million for his work.

A principal target of the lobbying effort was state controller and CalPERS board member Kathleen Connell, whom Polanco contacted by phone.

"This is people's . . . life savings they are counting on," said Robert Fellmeth, director of the Center for Public Interest Law in San Diego. "This decision should be really on its merits. It is no place for legislators to be intervening to make sure their friends and people they favor get the money."

Connell characterized her conversation with Polanco as a "for your information call," but it apparently served its purpose.

Transcripts of normally secret deliberations that were released by a state Senate committee investigating pay-to-play practices revealed that Connell was an outspoken advocate for Hicks, Muse. Connell even recommended that the amount given to Hicks, Muse be doubled to $200 million.

The board narrowly voted 7 to 4 to approve the investment over its staff's united objections.

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Steve Hemmerick, California Funds to Review Voting, Pensions & Investments (Sep. 15, 1997)

During hearings on alleged political influence peddling, the CEOs of CalPERS and CalSTRS, two of the nation's three largest pension funds, announced that the funds' boards would reconsider their voting procedures in the fall.

State Senator Adam Schiff said that a key concern is that political contributions are made to some board members at both retirement systems, but that no public record exists of roll call votes on alternative investments approved in closed session.

CalPERS CEO James Burton and CalSTRS CEO James Mosman testified that their boards planned to take up the issues of formally requiring members to announce when they have received contributions concerning matters they are deciding and providing roll-call votes on closed-door session items.

Neither official promised, however, their investment boards would change voting practices. Schiff indicated that he might introduce legislation to change the funds' closed-door voting processes unless they either open the meetings or provide roll-call votes.

The hearings were held in the wake of revelations that State Treasurer Matt Fong and State Controller Kathleen Connell, both of whom are CalPERS and CalSTRS board members, received campaign contributions from firms doing business with the pension funds in excess of $400,000. Neither testified at the hearings.

Ian Lanoff, fiduciary counsel for CalSTRS, said that CalSTRS board members might have been voting illegally on CalSTRS matters affecting contributors to their respective political campaigns. Lanoff said that under CalSTRS rules, he believed that it was illegal for board members to accept contributions from investment or other firms and then participate in discussions and vote on decisions affecting the firms or people making the contributions.

Mosman said that Lanoff's view has "never been quite that explicit" before.

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Shawn Neidorf, Donation Flap Embroils California Pensions, Venture Capital Journal (Oct. 1, 1997)

State Senator Adam Schiff, chair of the Senate Committee on Public Employees and Retirement, held hearings in August to discuss contributions to pension board members who are elected officials and the secrecy of private equity investment votes.

Schiff wants to see the individual votes from public pensions' private equity decisions made public so potential conflicts of interest may be spotted. Without access to the voting records of individual board members, it's impossible to adequately monitor for potential conflicts of interest, he noted at the hearing.

Schiff also raised the possibility of the pensions creating policies requiring a board member to disclose to the whole board that ht or she has received a campaign contribution from a firm or person with business before the pension. Or the individual or firm seeking a relationship with CalPERS or CalSTRS may be required to disclose to the entire board to whom contributions have been made.

State Treasurer Matt Fong and State Controller Kathleen Connell, both of whom are CalPERS and CalSTRS board members, received campaign contributions from firms doing business with the pension funds in excess of $400,000.

CalPERS and CalSTRS representatives indicated that their boards likely would be willing to have the votes revealed once deals were closed. If they aren't, the state legislature might force them.

CalSTRS officials have, in the past, considered requiring disclosure of donations by those doing business with the pension but dropped the idea when it became tangled in thorny details, explained CalSTRS CEO James Mosman at the hearing.

Whose donations counted? Only the firm and its principals? Their families? Members of the firm who weren't working on the pensions' business? Unable to resolve these questions, CalSTRS let the matter die, leaving it to the state Fair Political Practices Commission, Mosman said.

CalSTRS fiduciary counsel Ian Lanoff made what seemed to be a startling revelation at the hearing: that in his interpretation of the state's education code, it might be illegal for elected officials on the pension board to take contributions from individuals or firms who are before the board seeking investment. Under the code, board members who have received campaign would have to abstain not only from the vote but also the discussion, he said.

Mosman said he thought that the board's constitutional officers were receiving different counsel from their own attorneys regarding that legality. Schiff said, "I think it's perilous to ignore the advice of your own fiduciary."

Warren Hellman, whose private equity firm's single biggest investor is CalPERS, said "I contributed almost $60,000 in 1996 to various candidates. They're just all over the place." These contributions included $5,000 to Connell and $1,500 to Fong. His son and business partner, Marco Hellman, also donated $1,500 to Fong in 1996, and Hellman partner Tully Friedman gave $4,500 to Fong in 1995 and 1996. Matthew Barger, invoice manager at Hellman's firm, donated $1,900 to Fong in 1996.

Persons associated with Apollo Advisors, which does business with CalPERS, gave liberally to Connell. Apollo partner Mike Weiner gave Connell $500 in 1995 and $500 in 1996. Peter Copses, John Kissick, Jeff Moore, Antony Ressler, Bruce Spector, Laurence Berg, David Kaplan, Robert Byer, and Kenneth McCormick of Apollo each made contributions to Connell of $500 or $1,000 in 1995 and 1996.

Weiner said that there is no "specific" coordination of donations by Apollo investment professionals.

Connell's campaign donation solicitation practices were under evaluation - but not investigation at the time this article went to press - by the state attorney general's office.

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Paul Jacobs, Firms, Lobby, Woo State Pension Officials, Win Pacts, L.A. Times (Part 1, Feb. 2, 1998)

A state law designed specifically to stop contact between board members and those trying to sell investments to the $128-billion, CalPERS doesn't seem to be working. Records and interviews reveal that CalPERS committed hundreds of millions of dollars in discretionary investments to companies that had privately lobbied the board or had political or personal ties to boards members.

In 1997, CalPERS awarded $225 million to Lombard Investments for high-risk investments in Asia. The deal, the largest of its kind by CalPERS, was spawned at a series of exclusive conferences that featured oyster feeds on the rugged Oregon coast.

The conferences were hosted by Pacific Pension Institute, a nonprofit run by H. Lawrence Hull, a Lombard Investments consultant. Hull refused to answer questions about the relationship between Lombard and the institute. Records show, however, that the institute has sometimes paid the expenses of CalPERS officials.

When asked if meetings between CalPERS members and Lombard officials at the conference had given Lombard an advantage, CalPERS investment committee Chairman Valdes said "Yes, it's a leg up if you get the opportunity to talk to the right people, if you have the right package and the right personnel."

In December 1996, State Treasurer and CalPERS board member Matt Fong moved that CalPERS commit $225 million to Lombard for expanded investments in Asia. Lombard officials, their relatives, and business associates have contributed $32,000 to Fong's political campaigns, including $12,000 to his current race for the U.S. Senate. Fong denied that he was influenced by the contributions.

A 1991 law prohibits CalPERS board members from communicating with contractors whose "investment products" are being considered, according to Dave Elder, the law's author. CalPERS officials contend that the law applies only when the board is considering competitive bids, not to individual investment decisions.

Late last year, the L.A. district attorney's office asked CalPERS for information about a controversial $100-million investment in a Texas firm, Muse, Hicks, that followed private lobbying by a state senator and a former board member. The FBI has interviewed at least one board member and former board member about the deal, and federal agents are also looking into potential conflicts of interest on the part of elected officials who sit on pension boards and solicit campaign contributions from investment-related businesses.

Law enforcement officials need not look far to find evidence of corruption. In 1994, CalPERS allocated $60 million to Olympic Realty Advisors, a partnership that employed the son-in-law of board member Jerry Cremins. Nonetheless, Cremins voted on matters that eliminated some of Olympic's competitors, including one of the highest-rated companies in the competition. Cremins did not recuse himself until the final decision was reached.

When the CalPERS investment staff first reviewed a proposal to invest $75 million with L.A. firm Freeman Spogli & Co., which was co-founded by Mayor Richard Riordan, they concluded that it "did not represent an attractive opportunity." The investment was made, however, after it was championed by then-CalPERS board member Alfred Villalobos, who was a top Riordan deputy when he pushed for it in 1993 but had left the mayor's office when the deal was finalized.

One of Freeman Spogli's partners, William Wardlaw, a former political advisor to Riordan and former state Treasurer Kathleen Brown, whose representative on CalPERS voted for the investment, contributed at least $16,000 to Brown's campaign committees along with other Freeman officials in 1993 and 1994.

In late 1993, the CalPERS rejected an investment proposal from Blackstone Capital Partners. So Blackstone's top executives, including Pete Peterson, a former U.S. secretary of commerce, took their case directly to the individual board members, who eventually approved the deal.

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Paul Jacobs, Firms, Lobby, Woo State Pension Officials, Win Pacts, L.A. Times (Part 2, Feb. 2, 1998)

The custodians of CalPERS, the nation's largest pension fund, travel the world - England, Japan, Australia, Poland, Italy, France, Finland and across the USA. The trips often are underwritten by those who do business with the fund.

The subsidized travel is just one example of a pattern of financial and personal entanglements with contractors and others in the pension fund industry.

Records and interviews show that some board members have also accepted gifts, solicited campaign contributions and engaged in other activities that create an appearance of conflict of interest.

When two board members attended a conference in Eastern Europe the summer of 1997, their expenses were paid with fees collected by a business from pension fund money managers, who have a stake in board decisions. Board members Dr. Thomas Clark and Robert Carlson attended receptions at U.S. embassies and a walking tour of Prague, and paid visits to Krakow and Auschwitz.

After the trip, Carlson and Clark produced an enthusiastic report urging investments in Poland and the Czech Republic. But the CalPERS staff dismissed the proposal, pointing out that advisors recommended against putting money in either country.

State Treasurer Matt Fong, a CalPERS board member, organized a tour of Asia for pension officials in 1997. The trip was financed by $350,000 collected from CalPERS contractors as well as other corporate sponsors.

Many board members and CalPERS executives accept free meals and tickets from private interests. And some play in an annual charity golf tournament - with their individual $500 entry fees picked up by CalPERS real estate consultants.

CalPERS board President William Crist raised money in the 1994 gubernatorial race for Democratic candidate Kathleen Brown, asking "everyone I knew" to contribute, including CalPERS money managers and business partners.

From 1994 to 1997, records show that about a third of the 112 foreign and out-of-state trips taken by CalPERS board members were subsidized entirely or in part by private interests, often companies that do business with CalPERS or would like to do so.

Three CalPERS board members account for most trips outside of California: Crist, Valdes, and Carlson.

 
Trips to Other States
Foreign Trips
Some Destinations
Charles Valdes
40
11
Japan, Hong Kong, Singapore
William Crist
35
15
Paris, Hong Kong, Australia
Robert Carlson
16
8
Prague, Warsaw, Paris

Fong and state Controller Kathleen Connell have called for a new board policy that would require anyone seeking a contract or other financial commitment from the board to disclose all gifts, charitable donations and campaign contributions to any pension system board or staff members. But at a November 1997 board meeting, neither could muster the support needed for expanded disclosure policies.

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Editorial, Not Quite Clean Enough CalPERS Must Tighten Its Rules to Erase Any Doubts, L.A. Times (Feb. 5, 1998)

Members of CalPERS' board have taken trips paid for by private companies, and invested CalPERS funds in firms that made campaign contributions to and personally lobbied them.

In defense of the trust fund, one board member said that the agency was "pretty clean." But pretty clean isn't good enough for a bureaucracy entrusted with the retirement savings of state and local government employees.

State law should ban contact by the board with firms seeking CalPERS business, and such firms should be required to disclose any gifts or campaign contributions made to any CalPERS board or staff member.

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Shawn Neidorf, Press, FBI, Legislature Examine CalPERS, Venture Capital Journal (Mar. 1, 1998)

In the wake or revelation of campaign contributions, trips abroad, direct lobbying, gift giving - all to CalPERS board members and by firms that seek to do business with CalPERS - the FBI is questioning current and former CalPERS trustees.

James Mattock, special agent in charge of the FBI's Sacramento division, acknowledged that his bureau had questioned people involved with CalPERS. He said the agency was obliged to look into all allegations of impropriety to determine whether an investigation is warranted but would not specify whether an investigation had begun.

The L.A. Times reported that CalPERS CEO James Burton sent a confidential memo to pension trustees advising them that they were not obliged to cooperate with the FBI unless they were subpoenaed. Mr. Burton asked trustees to inform him about what occurred in the conversation if any questioning had taken place in the absence of a CalPERS lawyer. CalPERS spokeswoman Pat Macht declined to release the memo.

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Daniel Meisler, Campaign Finance Report: Senate Panel Report Cites Stephens, Fong Meeting, The Bond Buyer (Mar. 9, 1998)

A U.S. Senate Governmental Affairs Committee report on campaign finance abuses identified questionable practices by Democratic fundraiser John Huang while employed at the Department of Commerce.

Officials of Stephens Inc. provided Huang with free office space, where he received packages, phone calls and faxes. Vernon Weaver, who worked in the public finance division at Stephens, would call Huang at Commerce to inform him of messages. The report describes on favor that Huang did in return for Stephens' services: introducing Weaver to California Treasurer Matt Fong to help Stephens obtain bond-underwriting business from California. Stephens subsequently did four bond deals with California.

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Kathleen Morris, Governance Doc, Heal Thyself, Business Week (Mar. 16, 1998)

The California Public Employees' Retirement System is well known for the list of unresponsive company boards it publishes each year. But CalPERS now finds itself under scrutiny for the same conflicts of interest that put companies on its hit list.

After extensive reporting of payments and gifts to CalPERS board members by those seeking to win CalPERS business, the board has adopted rules prohibiting members from taking campaign contributions from companies with current or potential business with CalPERS. This may not be enough.

The SEC and FBI are investigating pay to play practices in California, and the California Senate is considering a bill to require companies that do business with CalPERS to disclose ties with board members or gifts or political contributions to them.

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Shawn Neidorf, CalPERS Bans Campaign Donations Buyouts (Apr. 20, 1998)

In February 1998, CalPERS enacted a ban on campaign contributions to board members from those who seek or do business with the pension fund.

California Senators Adam Schiff and Tom Hayden have introduced legislation that would require disclosure of campaign contributions of $250 or more and gifts of at least $50 by anyone seeking business with CalPERS. CalPERS board members also would be prohibited from having unsanctioned contact with those doing or seeking business with CalPERS, including private equity investments.

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Eric Bailey, Firms With State Pacts Are Fertile Donors to Fong, L.A. Times (May 25, 1998)

Campaign records show that law firms and others vying to profit from the state's bond deals have a donated more than $325,000 to Fong, even as federal securities officials have pushed to ban what they consider a "pay-to-play" system of campaign patronage. Fong also received $150,000 from firms tied to the state's two biggest employee pension funds.

In some ways, fund-raising has not been as easy for Fong as for his predecessors. Bond underwriting firms, long among the most prolific givers, have been hampered since 1994 by a securities industry restriction on campaign donations. Kathleen Brown, who preceded Fong, received more than $450,000 from underwriters with a stake in state bond deals. Fong gleaned less than $50,000.

Fong's biggest contributors among those doing business at his office are law firms involved in bond deals, records show. They donated more than $275,000.

In recent years, the Securities and Exchange Commission has pushed for restrictions on such donations from bond counsels. "We see it as an ethical concern," said Paul Maco, director of the SEC's municipal securities office.

Last year, the American Bar Association condemned the practice and urged state bar associations to craft rules eliminating any perception of a pay-to-play system. So far, none have taken that step, and the contributions continue.

Between 1990 and 1998, Fong collected more than $9.4 million, almost $1.5 million of which came from financial services firms and other professionals. One of the largest contributors was Lombard Investments, which contributed $32,000 and won a $225 million investment from CalPERS when Fong was a CalPERS board member.

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Virginia Ellis, Connell Sues Over Ban on Political Donations to State Pension Officials, L.A. Times (July 4, 1998)

State Controller Kathleen Connell's campaign committee has asked the courts to strike down reforms that prohibit many businesses from contributing to members of the board. The rule, passed in February, prohibits contractors and investment firms that do business or wish to do business with CalPERS from making political contributions to any of its board members.

Connell claims that the rule unfairly discriminates against her and state Treasurer Matt Fong as the only elected officials on the board. The lawsuit listed nine individuals who had contributed $56,000 to Connell in the past but were declining to donate to her campaign this year because of the new ethics policy.

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Dan Smith, Connell Accused of Shunning Non-Donor, Sacramento Bee (Aug. 14, 1998)

State Controller Kathleen Connell repeatedly solicited campaign contributions from the head of a firm that advises California's pension board, and her office shunned the firm when her requests for money were denied, investment consultant Leslie Brun has alleged in court documents.

Brun's declaration is part of CalPERS response to a lawsuit Connell filed challenging the board's right to restrict her campaign fund raising.

The CalPERS response contends that Connell, a board member, has "placed advancement of her political career ahead of her constitutional duty to serve the interest of millions of public employees and retirees."

Connell's suit says the rule has "seriously interfered" with her ability to raise funds for hear re-election effort and violates the First Amendment rights of her supporters by restricting their ability to financially back her campaigns.

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Editorial, Three for California, Fresno Bee (Oct. 20, 1998)

An ardent self-promoter even by state political standards, state Controller Kathleen Connell has offended Republicans and Democrats alike with her arrogance, her abuse of talented senior state managers, her attempts to micromanage and politicize agencies, her half-baked policy ideas and her heavy-handed campaign fund-raising among persons who do business with the state pension funds, on whose boards she sits.

When her fund-raising prompted legislative hearing and federal inquiries into whether pension board contractors were being made to "pay-to-play," CalPERS passed rules barring board members from taking contributions from contractors. Connell promptly sued to block the rules, and she's still soliciting funds from the contactors, dollars that could end up in her own pocket since she has a large outstanding loan to her campaign committee.

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Barry Rehfeld, Confrontation in California, Institutional Investor (April 1999)

Kathleen Connell began her tenure as state Controller as an advocate of reforming, chastising board members for accepting trips and gifts from firms doing business with the CalPERS. But revelations regarding campaign contributions she solicited and received from the same firms may be what she is most remembered for.

One example is the replacement of long-time CalPERS manager Abbott Capital Management was replaced by Pathway Capital Management, whose CEO, Douglas Le Bon had contributed $20,000 to Connell's campaign coffers.

Over the objections of staff, Connell supported retaining TCW Realty Advisors to manage CalPERS real estate assets, notwithstanding that TCW had substantially underperformed its peers. TCW executives apparently contributed $24,000 to Connell, and hosted two fundraisers for her.

In response to reports of these and similar incidents, prompted the CalPERS board to ban all contributions from firms doing business with the pension fund.

Connell successfully challenged the rule, convincing a court to overturn it on the grounds that the board hadn't followed a series of steps that state agencies must to approve policies. "It's a clear conflict of interest for her to accept any money from companies doing business with the pension funds," insists Jim Knox, the director of California Common Cause, "but she sued so she could buy time to build her war chest."

Indeed, among contributors with ties to California pension funds, Connell collected some $7,000 in October from West coast partners and executives of New York-based Apollo Advisors, a major private equity manager for CalPERS; and $10,000 from Thomas Lee, whose Boston-based buyout firm is a large private equity manager for both CalPERS and CalSTRS.

The overturned CalPERS rule was reintroduced in October 1998 to conform to procedural requirements and may be passed at CalPERS within the next few months.

Certainly there's much at stake. Public pension funds manager some $2.4 trillion in funds, including more than $300 billion in California and New York, two states where there currently are few limitations on contributions. Across the country elected officials serve as a trustees in many of the hundreds of state and local plans.

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Andrew LePage, California Retirement Board Fund Supports Measure to Stop Campaign Fund, The Sacramento Bee (Oct. 21, 1999)

The CalPERS governing board voted 8-3 Wednesday to support a federal proposal to stamp out "pay-to-play" campaign contribution fraud.

The pay-to-play rule, proposed by the Securities and Exchange Commission, would prohibit an investment company from doing business with a pension fund for two years after it has contributed to a state or local politician who serves on or is elected to that pension fund's board.

The SEC says the regulation will eliminate even the appearance of a conflict of interest between elected officials serving on public pension fund boards and the contributions they get from investment advisers and managers.

State Controller Kathleen Connell abstained from the vote, and Marty Morgenstern, head of the state Department of Personnel Administration, and State Treasurer Phil Angelides opposed it.

The two CalPERS board members with perhaps the most to lose in the even that the SEC rule is adopted in current form are the state treasurer and controller. Both historically have relied heavily on investment community contributions.

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