[ by Howard Haykin ]

Goldman's settlement represents the largest amounts ever imposed by the SEC for MSRB pay-to-play violations.

The SEC on Thursday charged Goldman, Sachs & Co. and a former investment banker with "pay-to-play" violations involving undisclosed campaign contributions to then-Massachusetts state treasurer Timothy Cahill while he was a candidate for governor.

Pay-to-play schemes involve campaign contributions or other payments made in an attempt to influence the awarding of lucrative public contracts for securities underwriting business. This marks the first SEC enforcement action for pay-to-play violations involving "in-kind" non-cash contributions to a political campaign.

SEC Findings and Allegations. Neil Morrison was a VP Goldman Boston office and solicited underwriting business from the Massachusetts treasurer’s office beginning in July 2008.  Morrison also was substantially engaged in working on Mr. Cahill’s political campaigns for nearly 2 years - November 2008 to October 2010. 

Morrison at times conducted campaign activities from the his office during work hours and used the firm’s phones and e-mail system.  Morrison’s use of Goldman Sachs work time and resources for campaign activities constituted valuable in-kind campaign contributions to Cahill that were attributable to Goldman Sachs and disqualified the firm from engaging in municipal underwriting business with certain Massachusetts municipal issuers for two years after the contributions.

"The pay-to-play rules are clear: municipal finance professionals that use their firm’s resources to campaign on behalf of political candidates compromise themselves and the firms that employ them."  -- Robert Khuzami, SEC Enforcement Director. 

"Fighting efforts to improperly influence the underwriting selection process is one of the unit’s top priorities. These practices result in undisclosed conflicts of interest and undermine public confidence in the integrity of the municipal securities market."  -- Elaine Greenberg, SEC Enforcement, Chief of Municipal Securities and Public Pensions Unit.

Morrison engaged in numerous campaign activities for Mr. Cahill, including the following:  (i) fundraising, (ii) drafting speeches, (iii) communicating with reporters, (iv) approving personnel decisions, and, (v)  interviewing at least one possible running mate.  At times, Morrison referenced his campaign work while soliciting underwriting business in an apparent attempt to curry favor during the selection process.  Morrison sent e-mails to a deputy treasurer in Cahill’s office making the following statements while discussing the selection of underwriters.  Here are examples:

"The boss [Cahill] mentioned to me this morning that he spoke to [the Assistant Treasurer] and that it is looking good for us [Goldman Sachs] on the build America bond deal."

"From my standpoint as an advisor/consultant/friend I am saying, PLEASE don’t give these [underwriter] slots away willy-nilly. 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. This has to be a political decision."

"We have discussed the Build American Bond transaction and how important it is to me. You have been great keeping me up to speed. This is my number 1 priority and most important ask. Having Goldman as the lead and getting 50% of the economics would be such a home run for me."

In addition to his direct campaign work for Mr. Cahill, Morrison allegedly made an indirect cash contribution to Cahill by giving cash to a friend who then wrote a check to the Cahill campaign. Morrison’s campaign work and his indirect financial contribution created a conflict of interest that was not disclosed by Goldman Sachs in the relevant municipal securities offerings in violation of pay-to-play rules. 

Morrison himself acknowledged the existence of this conflict in an e-mail to a campaign official, saying, "I am staying in banking and don’t want a story that says that I am helping Cahill, who is giving me banking business. If that came out, I’m sure I wouldn’t get any more business."

According to the SEC’s orders against Goldman Sachs and Morrison, Goldman Sachs terminated Morrison in December 2010.  Nevertheless, Goldman Sachs subsequently participated in 30 prohibited underwritings with Massachusetts issuers and, in the process, earned over $7.5 million in underwriting fees.  

SEC Determination of Violations and Sanctions. Goldman Sachs agreed to settle with the SEC, and in doing so acknowledged that SEC noted in its complaint that Goldman allegedly violated the following rules:

• Section 15B(c)(1) of the Exchange Act and MSRB Rule G-37(b), which prohibits firms from underwriting offerings for municipal issuers within 2 years after any contribution to an official of such issuer.
• MSRB Rules G-37(e), G-8 and G-9 in that it did not disclose any of the contributions on MSRB Forms G-37, and did not make or keep records of the contributions.
• MSRB Rule G-17 by not taking steps to ensure that the attributed contributions or campaign work or the conflicts of interest raised by them were disclosed in the bond offering documents.  (G-17 requires B/D's to deal fairly and not engage in any deceptive, dishonest, or unfair practice).
• MSRB Rule G-27 by failing to effectively supervise Morrison.

To settle these charges, Goldman Sachs agreed to pay over $7.5 million in disgorgement, $670K in prejudgment interest, and $3.75 million in penalties.  Those are the largest amounts ever imposed by the SEC for MSRB pay-to-play violations.

Charges Against Morrison. While Goldman settled, the SEC case against Morrison continues.  In its order, the SEC alleged that Morrison violated the following rules:

• MSRB Rule G-37(d) by making a secret, undisclosed cash campaign contribution to Cahill.
• MSRB Rule G-37(c) by soliciting campaign contributions for Cahill.
• MSRB Rule G-17 by failing to disclose conflicts of interest to the purchasers of municipal securities.
• In addition, Morrison caused Goldman Sachs to violate Rule G-8, Rule G-9, Rule G-37(b) and Rule G-37(e).

SEC Staff Credits. Investigation by Enforcement's Muni Securities and Public Pensions Unit:  Louis Randazzo, LeeAnn Ghazil Gaunt; supervised by Unit Chief Elaine Greenberg, Mark Zehner.  Richard Harper of the SEC Boston Regional Office will lead the litigation against Morrison.

Footnote:  The SEC adopted new measures in June 2010 to significantly curtail the corrupting influence of pay-to-play practices by investment advisers.

For additional details, go to:  [SEC PR 12-199, 9/27/12] and [SEC Order in the Matter of Goldman, Sachs & Co.] and  [SEC order in the Matter of Morrison].