How the Securities Bureau's investor education fund paid for its LGC investigation
How the Securities Bureau's investor education fund paid for its LGC investigation
In August 2011, UBS Financial Services reached a $1 million settlement with the New Hampshire Bureau of Securities Regulation for violations relating to the sale of structured products. Of that settlement, $300,000 was to be paid to the bureau for fine and investigatory costs, to be deposited, by law, in an investor education fund.According to state law, such fines, "after deducting administrative costs," are supposed to be used to "provide information to the residents of this state about investments in securities, to help investors and potential investors evaluate investment decisions, to protect themselves from unfair, inequitable or fraudulent offerings."Anything not spent over $750,000, is supposed to go back to the general fund.But in the last few years, at least $500,000 from that fund has been going to the bureau's ongoing battle with the Local Government Center for allegedly failing to return surplus funds from its pooled risk insurance programs to its member municipalities.That has been the way the bureau has been operating for more than a decade, according to Secretary of State Bill Gardner, whose department includes the bureau."Everything is run through fines," said Gardner, who added that the funding arrangement is what the Legislature wanted when it enacted the law - and it was something he opposed from the start.Nevertheless, said Gardner, "the law says the money could be used for administrative costs."By "administrative costs," Gardner doesn't mean the money that went to get the fine in the first place, but the money spent to win the next one.Indeed, if last August's decision by hearing officer Donald Mitchell -- a consultant paid with $129,000 of investor education funds -- is upheld by the state Supreme Court, the affected towns won't just get some $50 million restitution from their insurance payments. The bureau also would be paid for $480,000 in expenses. Those expenses have already been paid with money from a previous settlement, but final expenses might total considerably more.Paying consultantsRecords from the state's TransparentNH website show that the Securities Bureaus spent some $833,000 on consultants between July 1, 2011, and Nov. 30, 2012, primarily to work on the LGC case.Some $427,000 alone went to Bernstein Shur, the law firm of Andru Volinsky, who the bureau retained as special counsel at the time. Another $118,000 went to two young lawyers initially paid as consultants as well, even though they were initially identified as staff attorneys and have since been hired by the department to fill vacant positions. (One of those attorneys -- Eric Forcier -- was originally brought in as a consultant to work on the bureau's Financial Resources Mortgage Inc. Ponzi investigation.)Gardner said that the legal costs were relatively cheap compared to the amount he said was expended by the Local Government Center - costs that he said were being paid "with taxpayer money." (The LGC, which is funded by municipalities, provides services and acts as a clearinghouse, among other things, to cities and towns in New Hampshire.) He presented it as a case of "David vs. Goliath.""The number of lawyers they have thrown at us was unbelievable," Gardner said. "We faced motion after motion, and I thought, 'We aren't going to be able to do this.'""The Local Government Center does not believe that it is LGC's role to judge the funding sources utilized by our Regulator to fund their activities -- what we really want is an opportunity to work cooperatively with our Regulator to resolve the pending case as soon as possible and to develop a working relationship that best serves the citizens of New Hampshire," said Tom Enright, board chair of the LGC, in a statement.During the same 17 months, the bureau paid a consultant -- Warren Thomas Boulter -- $29,000 to actually work on investor education. During the previous four years (starting July 1, 2008), the consultant received just over $40,000.Tyco settlementThe Securities Bureau's investor education effort features a website and various classes on related topics. The bureau also lists 29 investor education actions taken in the past year, ranging from an investor education call-in show to press releases on various enforcement actions (the actions that raise money for the investor education fund.)But there is another source for investor education funding (as well as education about corporate responsibility and business ethics): a $6.2 million endowment sitting at the University System of New Hampshire. The pot of money has been dormant for the last two years, as the committee in charge of the funds - which includes Bill Gardner - figures out what to do with it.The USNH money is a result of what was at the time the bureau's biggest settlement to date - a $5 million consent in October 2002 against Tyco International, when the conglomerate was based in Exeter.The settlement also included the resignation of the entire Tyco board for allowing then-CEO Dennis Kozlowski and other top officials to loot the company at the expense of stockholders. The action catapulted the Securities Bureau into the spotlight.The following fall, the bureau announced with great fanfare the formation of the Center for Public Responsibility and Corporate Citizenship -- a "non-profit, non-partisan initiative dedicated to strengthening corporate governance practices by fostering a spirit of ethical awareness and responsible citizenship among business and civic leaders."The center, however, was rather low-key until the end of 2005, it hired former CNN financial editor Myron Kandel as its head. The center held some high-profile forums, entitled the Initiative For Corporate Responsibility and Investor Protection.One such forum involved then-U.S. Attorney General Dick Thornburgh and former Securities and Exchange Commission Chairman Harvey Pitt. It was held at the University New Hampshire in 2007.However, after Kandel's three-year stint was up (at a price tag of $400,000), the initiative disappeared. Calls to Kandel were not returned by deadline, but USNH Chancellor Ed MacKay said that the decision for him to leave the center was "mutual"All told, the center spent has spent some $900,000 in the last 10 years, according to Securities Bureau Director Barry J. Glennon. Aside from Kandel's compensation, the center's biggest expense was a $125,000 grant to the NH Jump$tart Coalition, which helps promote financial literacy in public schools.The center has no website, contact person or staff. The website link originally used for the Center For Corporate Responsibility now is used by an organization devoted to "Bringing back the USA" so that it will "follow Godly principles."The center is currently run by a board headed by Gardner and MacKay. The last expenditure -- in February 2011 -- was for a survey conducted on the best practices of teaching corporate governance in the university system, Glennon said.The center's board last met in April 2012."We've been exploring a long-term solution," said MacKay. By "we," MacKay said, he primarily meant himself and Gardner.Gardner said that the group will meet soon to figure out what to do with the money, but at deadline, a date had yet to be set.Self-fundingThe Tyco settlement came less than a decade after the bureau was made a self-funded agency by the Legislature.The bureau started out as kind of a forlorn orphan when it was moved from the Insurance Department to the Secretary of State in the early '90s. It was one of 11 state agencies run out of similar offices around the country. These 11 offices banded together, and the New Hampshire bureau started getting a share of settlements -- the first such income for New Hampshire since the Great Depression, Gardner noted.The first fine -- $75,000 - was a wake-up call, and when the Bureau took in $500,000 as part of a national settlement, New Hampshire officials came calling. Specifically, it was then-Gov. Steve Merrill and his legislative budget director, Doug Scamman. The way Gardner tells it, both demanded that the Securities Bureau fund itself through fines as a way to reduce the general fund budget."No, no. I don't want to go through this route," Gardner recalls himself saying. "What if there are no fines to cover it?"But the two laid down the law (which the Legislature later passed), and it has all worked out, Gardner said, "because we've had a pretty good track record."The aforementioned $1 million UBS settlement in August 2011 is just one of the latest examples. Others include a $5 million settlement in July 2005 with American Express (with $375,000 going to the bureau); an October 2006 settlement with ING for $3 million (with $225,000 going to the bureau); and a $3.25 million settlement in 2008 with Ameriprise (with $250,000 going to the bureau).The bureau's budget is also augmented by fees paid by those who register with the bureau, but without the fines earmarked for investor education the bureau would be in the same situation as other state agencies, said Gardner.If Securities doesn't bring in the settlements, "the next year we don't have a bureau, unless the Legislature makes an allocation. Think about that," Gardner said.Every year, Gardner said, the bureau has been able to raise $750,000 for its base budget for next year and then some. Last year, it returned $1.2 million to the general fund, and that's after the LGC litigation. As a result - and the fact that the Secretary of State reports to the Legislature and not the governor -- the bureau has had relative autonomy, said Gardner.The bureau, for instance, is exempt from the same contract procedures required of other agencies, which raised some red flags during a 2007 audit of the Secretary of State's Office by the Office of Legislative Budget Assistant.That audit faulted the Secretary of State for not documenting one Securities Bureau contract "to measure and demand performance from the contractor" as well as another bureau contract with an independent contractor.The bureau replied that the contractor helped with several investor education projects, and was registered as a vendor with the state.Lawmakers familiar with the bureau arrangement don't seem troubled by it."We never looked at the details of where Securities gets its money or does with its money because it doesn't really affect the general fund," said Rep. Susan Almy, D-Lebanon, who chairs the House Ways and Means Committee. "It is one of the smaller revenue sources, and I don't believe we ever discussed it.""I guess it [the LGC litigation] could be a form of education," said Sen. Andy Sanborn, R-Bedford, who chairs the state Senate Commerce Committee, with a chuckle. "I suppose it could be stated more clearly in the legislation. It shows how little oversight there is when an agency is living off the revenue that they collect."
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This article appears in the January 25 2013 issue of New Hampshire Business Review