• SEC Issues Cease and Desist Order Against Goldman Sachs for Pay-to-Play Violations
  • November 9, 2012 | Author: Justin B. Ettelson
  • Law Firm: Saul Ewing LLP - Philadelphia Office
  • With campaign season upon us and fundraising efforts by local and national campaigns in full swing, an order issued by the Securities and Exchange Commission (SEC) on September 27, 2012, instituting administrative and cease-and-desist proceedings (Order) against Goldman, Sachs & Co. (Goldman Sachs) for violations of the Municipal Securities Rulemaking Board’s (MSRB) pay-to-play rules, is a good reminder for brokers, dealers and municipal securities dealers of the issues and pitfalls associated with making political contributions. According to the Order, the SEC found that Goldman Sachs and Neil M.M. Morrison (Morrison), a former vice president in one of the investment banking division’s Boston offices, solicited municipal underwriting business from the Commonwealth of Massachusetts, among other issuers, while Morrison participated in the gubernatorial campaign of Timothy P. Cahill (Cahill), the then-Treasurer of Massachusetts, and made valuable and undisclosed “in-kind” campaign contributions to Cahill through the use of Goldman Sachs resources including phones, e-mail and office space. Prior to his employment with Goldman Sachs, Morrison was employed by the Massachusetts Treasurers’ Office and reported directly to Cahill.

    The SEC found that, from July 2008 through October 2010, Goldman Sachs participated as senior manager, co-senior manager, or co-manager for thirty negotiated underwritings totaling approximately $9 billion, for which Goldman Sachs received $7,558,942 in fees. Pursuant to the Order and offer of settlement, Goldman Sachs disgorged all of the fees received plus prejudgment interest of $670,033. Goldman Sachs was also ordered to pay a civil money penalty of $3.75 million, of which $1.875 million was transferred to the MSRB. The case against Morrison is pending.

    MSRB Rule G-37 provides that, “[n]o broker, dealer or municipal securities dealer shall engage in municipal securities business with an issuer within two years after any contribution to an official of such issuer made by: (A) the broker, dealer or municipal securities dealer; (B) any municipal finance professional associated with such broker, dealer or municipal securities dealer; or (C) any political action committee controlled by the broker, dealer or municipal securities dealer or by any municipal finance professional.” A “municipal finance professional” includes any person “primarily engaged in municipal securities activities” or “who solicits municipal securities business.” “Municipal securities business” includes “the purchase of a primary offering of municipal securities from [an] issuer on other than a competitive bid basis (e.g., negotiated underwriting).” An “official of an issuer” is any person who was, at the time of the contribution, an incumbent, candidate or successful candidate for elective office of the issuer or any elective office of a state or political subdivision, “which office has authority to appoint any person who is, directly or indirectly responsible for, or can influence the outcome of, the hiring of a broker, dealer or municipal securities dealer for municipal securities business by the issuer.”

    Rule G-37 provides a carve out for contributions made by municipal finance professionals to officials of an issuer if the municipal finance professional is entitled to vote for the official and the contributions, in total, are not in excess of $250 per election. As noted by the SEC, there is no requirement to show “that municipal securities business was actually given in exchange for the contribution.” Rule G-37 also requires each broker, dealer or municipal securities dealer to file with the MSRB Form G-37/G-38 on a quarterly basis setting forth political contributions made to issuer officials and payments made to political parties of states or political subdivisions, among other reporting items.

    In the present case, the SEC found that “Morrison’s campaign activities during his Goldman Sachs work hours and use of Goldman Sachs resources constituted valuable undisclosed ‘in-kind’ campaign contributions to Cahill attributable to Goldman Sachs.” Cahill, as Treasurer of Massachusetts, “was responsible for, or had the authority to appoint persons who were responsible for, the hiring of brokers, dealers, or municipal securities dealers for municipal securities business by the Commonwealth of Massachusetts and certain related issuers... .” In addition, Cahill “was a candidate for elective office which has authority to appoint persons who are directly or indirectly responsible for, or can influence the outcome of, the hiring of a broker, dealer or municipal securities dealer for municipal securities business of certain issuers . . . .”

    Morrison was listed on Goldman Sachs’ list of municipal finance professionals, and thus, fell within the definition of a “municipal finance professional” under MSRB rules. His campaign activities included soliciting contributions for fundraisers and arranging for others to solicit contributions, interviewing campaign consultants, preparing and reviewing campaign documents, participating on campaign conference calls and attending campaign meetings during work hours. Morrison also interviewed in the Goldman Sachs office one possible running mate for Cahill and negotiated and accepted contract terms for the campaign. Moreover, during work hours, “Morrison engaged in (a) fundraising; (b) drafting speeches and fundraising solicitation; (c) reviewing, approving and writing campaign memos, contracts, letters, talking points, campaign position papers, and responses to campaign issues; (d) attending and preparing for press conferences; (e) approving campaign invoices and expenditures; (f) approving personnel decisions, such as salaries and hiring; (g) negotiating with campaign personnel; (h) arranging advertisements and commercials; (i) communicating with reporters on behalf of the campaign; (j) reviewing the campaign’s budget; (k) recruiting supporters; (l) reviewing campaign leases for office space; (m) selecting county representatives; (n) interviewing consultants; (o) drafting campaign plans and quotations; (p) providing legal advice; and (q) assisting with debates.” Morrison also sent 364 campaign-related e-mails using his Goldman Sachs account.

    While working on Cahill’s campaign, Morrison actively solicited municipal securities business from the Treasurer’s Office. Morrison sent various e-mails during the relevant period to a Deputy Treasurer discussing the selection of underwriters, going so far as to say, “You are in the fight of your lives and need to reward loyalty and encourage friendship. If people aren’t willing to be creative with their support then they shouldn’t expect business.” The SEC also found that Morrison made a “secret, undisclosed cash campaign contribution to Cahill” by arranging for a $400 cash contribution to Cahill from a friend and writing a check in the friend’s name for $400.

    The SEC concluded that the “in-kind” contribution of Morrison’s services was attributable to Goldman Sachs and that, together with the indirect contribution by Morrison, disqualified Goldman Sachs from participating in the negotiated underwritings directed by the Treasurer’s Office. Moreover, Goldman Sachs failed to disclose the contributions on Form G-37/G-38 filings and, in contravention to MSRB Rule G-17, failed to disclose the conflict of interest in the relevant municipal securities offerings.

    SEC staff also found that Goldman Sachs violated MSRB Rule G-27 by failing to adequately supervise Morrison’s activities. In particular, the SEC found that “Morrison was able to engage in campaign work using Goldman Sachs resources [. . .] without detection in part because he worked in a one-person office and was supervised by a Goldman Sachs employee in New York.” In addition, “during an October 2009 compliance review of Morrison’s office in Boston, Goldman Sachs compliance personnel did not detect Morrison’s use of e-mails for his campaign activities or conduct any specific review of Morrison’s compliance with MSRB rules.”

    In connection with the aforementioned violations, SEC staff also found that Goldman Sachs violated MSRB Rule G-8, by failing to make and keep current records reflecting all direct and indirect contributions and MSRB Rule G-9, which requires brokers, dealers and municipal securities dealers to preserve records reflecting all direct and indirect contributions.

    Although there have been few SEC pay-to-play prosecutions in the recent past, this case serves as a reminder that brokers, dealers and municipal securities dealers must remain vigilant with respect to political contributions by the firm and its employees. Specifically, firms should:

    • Revisit their policies and procedures to ensure that all campaign contributions are identified and reported. Such policies and procedures should be clearly communicated to all employees that meet or could meet the definition of a municipal finance professional;
    • Ensure that they do not, for a period of two years from the date of a disqualifying contribution, solicit municipal securities business from an issuer other than on a competitive basis. Firms should maintain, update and periodically distribute a list of municipal issuers with whom the firm is disqualified from doing business;
    • Ensure that they have developed and implemented written supervisory procedures reasonably designed to ensure compliance with MSRB rules, including on-site review of satellite offices and routine review of e-mails by compliance personnel; and
    • Prepare and maintain all required books and records.