Public Pension Pay-to-Play Schemes: The Public Fund Supplies the Business, the Official Gets the Gifts

Public pension pay-to-play schemes exchange private benefits for decisions about who gets a public retirement fund’s investment business. The person approving a broker, directing trades or reviewing expenses may see the connection before anyone outside the organization does. In the New York pension action, the Securities and Exchange Commission alleged that brokers supplied gifts and entertainment while a fund official steered business their way and kept the benefits undisclosed.

This page follows the benefit, the investment decision and the records connecting them. Our broader municipal bond and public finance fraud page follows what public bodies tell investors about their finances.

Public Pension Business Was the Alleged Payoff

The Securities and Exchange Commission’s December 2016 New York pension announcement described an alleged exchange between a public fund’s investment official and two brokers. The former director of fixed income at the New York State Common Retirement Fund allegedly directed up to $2.5 billion in state business to the brokers. They worked at different broker-dealers and earned millions of dollars in commissions from that business.

The director’s position put him inside the decisions that generated those commissions. The agency described a fund serving more than one million public servants and beneficiaries, including police and fire personnel. Retirement money supplied the business opportunity. According to the agency, undisclosed benefits helped determine who received it.

The brokers allegedly spent more than $50,000 on hotel rooms and supplied a $17,400 luxury watch. The agency’s list of benefits also included restaurant and nightlife spending, concert tickets and a ski vacation. The agency alleged that the brokers supplied these benefits in exchange for the pension business. We call that a private shopping list attached to a public investment decision.

The Alleged Fraud Included Keeping the Gifts Secret

The Securities and Exchange Commission’s fraud allegation connected the gifts to the official’s duty to the public pension fund. According to the agency’s account of its complaint, the director had a duty to disclose the benefits he solicited and received. The agency alleged that he failed to disclose them and that both brokers knew he was keeping them from the fund.

The alleged concealment also involved the brokers. The agency said they took steps to keep the benefits secret and substantially assisted the director in concealing the scheme. It further alleged that one broker helped him obstruct the agency’s investigation.

That puts the disclosure record beside the spending record. A person who reviewed gift disclosures may know what the fund was told, while a person who processed a broker’s expenses may know what was paid. We connect those accounts with the pension business the broker received and the official’s role in directing it.

What Evidence Shows a Public Pension Pay-to-Play Scheme?

Whistleblowing evidence in a public pension pay-to-play scheme connects the benefit, the person with decision-making authority, the investment business and the account given to the fund. The New York allegations make those connections concrete: gifts flowed to the official, business flowed to the brokers, commissions followed, and the benefits allegedly stayed secret. Our work with the records behind a securities fraud allegation follows each part of that exchange.

A hotel invoice can identify the expense and its payer. The fund’s trading records can connect the recipient’s decisions to the broker’s earnings. The person who understood the approval process or handled the expense can explain why those documents belong together.

For someone inside a public pension fund or brokerage business, the useful detail may be a decision that the final records barely explain. Who selected the broker, who requested the benefit and who handled the disclosure are the connections we examine with you. The documents supply the transaction, and your knowledge supplies the decisions behind it.

Public Pension Business Leaves Different Fee and Commission Records

An investment adviser’s decisions about investments and allocations create a different record from a broker-dealer’s execution of trades and receipt of commissions. In the New York allegations, the Securities and Exchange Commission identified the recipients of the directed business as registered representatives at broker-dealers.

That distinction helps locate the decision and the payment. We examine the adviser’s investment decisions alongside the capacity in which each firm acted and the service for which it was paid. A placement-agent agreement adds another specific question: what did the agent undertake to do to bring investment business to the issuer?

A separate corporate-finance example shows benefits allegedly used to win placement business. A 2009 federal court opinion concerning National Century recounted a trust’s allegations that Credit Suisse earned $17 million in investment banking fees as financial adviser and placement agent for notes backed by healthcare accounts receivable. The trust alleged that Credit Suisse used valuable initial public offering share allocations to bribe one founder and attempt to bribe another into directing more business to it. For a public pension insider, that pay-for-business pattern makes the placement agreement, fee arrangement and communications worth examining together with us.

Public Pension Ownership Gives Whistleblower Incentives a Wider Reach

Public pension investments also connect whistleblower incentives to the companies whose shares the funds own. Do Corporate Whistleblower Laws Deter Accounting Fraud?, a March 2019 working paper hosted by MIT Sloan, studied companies held by state pension funds. It reported a 5% to 9% reduction in financial-statement indicators of accounting-fraud probability associated with exposure to state False Claims Acts through pension ownership.

The study also examined whether companies responded by spending more on internal auditing:

The paper suggests that an insider’s incentive to speak up can matter beyond what a company spends on its audit department. For public pension money, that puts attention on both the people awarding investment business and the people inside the companies receiving it.

Who Investigates Public Pension Pay-to-Play Schemes?

The Securities and Exchange Commission investigated and brought the civil fraud charges in the New York public pension action. Its Public Finance Abuse Unit conducted the investigation, and the agency credited assistance from the FBI and federal prosecutors in the Southern District of New York. The announcement also identified parallel criminal charges brought by that district’s U.S. Attorney’s Office.

For an insider considering reporting securities fraud to the SEC, we assess how the benefit, public investment decision and disclosure fit together. Eligible whistleblowers can share 10% to 30% of qualifying monetary sanctions collected through the SEC whistleblower program. We work through the program questions with you and securities whistleblower lawyers who understand public pension investment decisions.

The False Claims Act is a separate whistleblower framework for fraud against government money. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. Where whistleblower programs overlap, we assess which fits the conduct and whose money it reached, with you and False Claims Act whistleblower lawyers.

When You Know Why the Broker Got the Business

If you know who approved the investment business, who paid for the benefits or what stayed off the disclosure, speak with our whistleblower experts about the connection. We build the case around that decision and payment trail, bringing in securities whistleblower lawyers who understand public pension funds, brokerage commissions and placement arrangements. Bring us your inside knowledge, and we will stay with you through the process to build your strongest public pension whistleblower case.