This past September, former Connecticut Treasurer Paul Silvester admitted accepting cash kickbacks in return for placing $500 million in state pension investments with certain equity funds and pled guilty in federal court to bribery, racketeering and money laundering charges.
The scheme, as outlined by federal prosecutors, centered around the use of finder's fees for middlemen who brokered deals between the treasurer's office and private equity funds. While the use of finder's fees is legal, parts of some of those payments were then illegally kicked back to Silvester, who used the money to help finance his unsuccessful 1998 campaign. The former treasurer, who will be sentenced in March, also admitted to negotiating jobs for himself and others in his office in return for some of those investments.
While the roughly $20 billion state pension fund was not jeopardized- -the fund actually grew by nearly $2 billion during Silvester's tenure between September 1997 and February 1999--the scandal nevertheless has rocked Connecticut's political establishment. It has tarnished the reputations of high-ranking political figures from both parties who were connected, in one way or another, to the receipt of finder's fees. As Silvester names other names and those charges are investigated, the scandal could reach out and touch other prominent state politicians.
Ironically, Connecticut is the first of only two states to have enacted campaign finance legislation designed to address pay-to-play practices. Silvester's actions are thought to be at least in part an effort to get around those rules.
The effect the scandal will have on pay-to-play practices is just beginning to emerge. The Securities and Exchange Commission, which approved a 1994 rule designed to end broker-dealer participation in pay-to-play, is already considering a rule that would address pay-to- play in the investment adviser industry.
Beyond that, however, observers think the scandal's impact will be mainly limited to its home state, since Connecticut is one of only a handful where the treasurer has sole responsibility for investing all state funds, including state employee retirement funds. "The issue in this case is not pay-to-play so much as it is the sole fiduciary duty question," says Vermont State Treasurer James Douglas, who helped pass a 1997 state ban on Wall Street contributions to candidates for treasurer.
Another significant difference is that most state treasurers claim they do not pay finder's fees. "I don't think you'll see wholesale changes across the country because most states don't operate that way," says Nebraska State Treasurer Dave Heineman, who also serves as president of the National Association of State Treasurers. "I don't know whether this particular situation will have any effect on pay-to- play."
While the federal investigation in Connecticut is still under way, state officials there are already considering wide-ranging reforms. Current state Treasurer Denise Nappier, who defeated Silvester in 1998, has announced the state will seek reparations from any funds that knowingly took part in Silvester's illegal activities. Governor John G. Rowland has proposed creating a board of trustees to oversee all pension fund investments and related activities. The board would then appoint a chief investment officer to implement the board's decisions.
