Goldman Munis VP's Commitment To Client Service Extended To Breaking The Law To Run A Political Campaign Out Of His Office

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Today's story of the Goldman VP who underwrote a bunch of Massachusetts bond deals while also running the Massachusetts Treasurer's gubernatorial campaign is rather charming. He was hired to be, like, a little bit corrupt, and got in trouble for being too corrupt, and also for oversharing over monitored electronic communications, a complex of failings that he seems to share with everyone at every British bank. Here is why he was hired:

Between July 14, 2008 and December 19, 2010, [our protagonist Neil M.M.] Morrison was a vice president in Goldman Sachs’ investment banking division in one of the firm’s Boston, Massachusetts offices. ... Between January 2003 and June 2007, Morrison was employed by the Massachusetts Treasurer’s Office, which included positions as the first deputy treasurer, chief of staff and assistant treasurer, reporting directly to [Massachusetts Treasurer Tim] Cahill.

And here is why he was fired:

On September 9, 2009, Cahill officially announced his candidacy for Governor of Massachusetts. ... Starting in September 2009, Morrison became one of Cahill’s most trusted campaign advisers. As described below, he was involved in, and used Goldman Sachs resources for, numerous significant aspects of the campaign, including interviewing at least one possible running mate in his Goldman Sachs office, negotiating campaign contracts and accepting contract terms on behalf of the campaign during Goldman Sachs’ work hours and/or using Goldman Sachs’ telephones and e-mail.

And here is an assortment of things he said over Goldman email that in hindsight could have benefited from the warmer personal touch of a phone call:

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.

Aaaaand you won't! (Right? Actually, while Goldman settled the case and is paying like $12mm in fines and disgorgement to federal and state regulators, Morrison seems to be fighting on.)

I have a couple of items that I want to put out there in the interest of leaving nothing unsaid.
1. [give me a bond deal!]
2. [campaign fundraiser coming up!].

If you're ever tempted to say something "in the interest of leaving nothing unsaid," you might ponder whether there is another, more compelling interest.

What was Morrison thinking? For instance, it was illegal1 for him to give more than $250 in cash to Cahill's campaign. You could imagine violating that rule and giving Cahill tens of thousands of dollars to prove your loyalty and get him elected, but Morrison actually gave the campaign $400, which seems to have been arbitrarily chosen as a number that is big enough to be illegal but small enough to be pointlessly illegal. (Also he did it by handing cash in an envelope to a friend and telling the friend to give it to the campaign. Then, I can only assume, he emailed the friend about it from his work account. "Hey did you make my illegal campaign contribution yet? Thx!")

It was also plainly illegal, under MSRB Rule G-37(c)(i), for Morrison to fund-raise for Cahill. It is less clear to me that the other stuff was plainly illegal - the rule talks only about "contributions," not "work," and while everyone seems to take the view that it includes "in-kind contributions" like negotiating contracts, the MSRB is in the process of clarifying that view so you could almost imagine Morrison not knowing that some of his work for Cahill's campaign was illegal.2

You'd think this wouldn't be so hard, but of course it is. What was Morrison's job? What did he think? Another email:

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 [the SEC says that this was "apparently referencing the upcoming election"] 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.

The dude's job was clearly "Tim Cahill's advisor/consultant/friend"; that's how he conceived of it, and he assumed that everyone else - in the campaign, in the Massachusetts Treasury office, and in the rest of the muni banking world - saw it the same way and gave out underwriting assignments for political loyalty and personal service and general advice that starts at "you should sell bonds of this size and tenor" but extends quickly and seamlessly to "you should do X with your life, and Y with your campaign's office lease." Goldman just gave him an office, and a paycheck. And some privacy - I enjoyed this3:

Morrison was able to engage in the campaign work using Goldman Sachs resources over an extended period of time without detection in part because he worked in a one-person office and was supervised by a Goldman Sachs employee who was located in New York.

What did Goldman think his job was? I mean, I'm sure he's a smart guy who knows about municipal finance and so forth, but the answer has to be "Tim Cahill's advisor/consultant/friend," no? It can't be a coincidence that they hired the Massachusetts Treasurer's chief deputy to pitch bond deals to the Massachusetts Treasurer. And then left him off on his own in Boston. He was one guy with a rented office; one suspects that relatively little of the business he won came from creative financial modeling and pitchbooks expertly formatted by the analysts he didn't have. Here's the SEC again:

Goldman Sachs should have taken additional steps to ensure Morrison’s compliance in light of the fact that the firm knew that he had a political background, had a personal relationship with Cahill, and that he had a close relationship with other issuer employees. For example, in a September 5, 2008 e-mail to his supervisors about the reasons that Goldman Sachs received certain underwriting business from the Massachusetts Housing Finance Authority, Morrison bragged “realistically, if you really want to know, I got [the Vice Chair of the issuer’s] son several job interviews and one of them panned out. [The Vice Chair of the issuer] has now turned up the heat with the staff and [a senior staff member of the issuer] has responded.”

Goldman didn't complain about this, and how could they? Getting client executives' dumb kids cushy jobs is, like, half of what investment bankers do. (The other half is getting former client executives new jobs at new clients. Also there's some Excel.) Notice too that the SEC didn't complain about this: pay-to-play in the form of campaign contributions is clearly illegal; pay-to-play in the form of regular old nepotism isn't.4 If the operation he'd run out of his Goldman office was "get Tim Cahill's kid a job," or even "get Tim Cahill a job other than elected office," he'd be fine.5 Instead it was "get Tim Cahill a job as governor," and that brings down the law.

SEC Charges Goldman Sachs and Former Vice President in Pay-to-Play Probe Involving Contributions to Former Massachusetts State Treasurer [SEC]
Goldman to Pay $12 Million to Settle S.E.C. ‘Pay to Play’ Case [DealBook]

1."Illegal" isn't quite right; the word is "disqualifying": if you make campaign contributions, etc., then you can't underwrite municipal bonds for the relevant issuer for two years. And you're supposed to self-disclose that. Morrison, and thus Goldman, made the contributions, didn't disclose it, and then underwrote bonds; it's that contribution that's illegal.

2.That probably overstates what's going on, but I did kind of fall down the rabbithole of reading these new MSRB proposals and the related commentletters, which are mostly about "in-kind contributions" made to bond ballot campaigns. That is, various things bankers do to help municipalities get voter approval to sell bonds are illegal or going to be illegal, because the municipalities might unfairly (?) reward those banks by hiring them to sell those bonds. That is not entirely intuitive.

3.Not only because I have fond memories of working out of a Goldman Boston office, though that one had more than one person in it. Still. I cannot adequately convey, in this footnote, how nice it is to work in a private office with a window overlooking Boston Harbor when the alternative is a crowded trading floor never touched by natural light. I'm tearing up just thinking about it.

4.IS IT? Leave your answer in the comments. I assert:

  • getting your client's kid a job and then hitting him up for business is fine and the way of the world;
  • explicitly promising to get your client's kid a job in exchange for business is bribery, or bribery-ish, if your client is a public official, but probably borderline okay if your client is a corporate executive; and
  • I am not a lawyer and don't try this at home.

5.Also he'd have had a better chance of success? From Wikipedia, Tim Cahill seems to have done badly even by the standards of Masachusetts politics; while he managed 8% of the vote as an independent, his lieutenant governor candidate endorsed his opponent, he sued a bunch of his advisers, and he got indicted for funding his campaign by stealing from the state lottery. So, good times.

Related

Now Here Are Some Guys Who Knew How To Rip Off A Client

One aspect of good salesmanship is that you have to offer an attractive proposition not merely to the abstract entity that is your nominal client - El Paso, Italy, Greece - but also to the specific human being who is your contact at that client. Telling a corporate treasurer who is five years from retirement that a trade will have a significantly positive NPV due to huge cash flows in years 11-15 is not always as effective a sales technique as buying him a nice steak and an evening of unclothed entertainment. I suspect, though, that the latter strategy is more highly correlated with whatever you're selling ending up on the front page/op-ed page/sec.gov. Anyway, I definitely admire these guys for this particular con*: The SEC alleges that Argyll Investments LLC’s purported stock-collateralized loan business is merely a fraud perpetrated by James T. Miceli and Douglas A. McClain, Jr. to acquire publicly traded stock from corporate officers and directors at a discounted price from market value, separately sell the shares for full market value in order to fund the loan, and use the remaining proceeds from the sale of the collateral for their own personal benefit. Miceli, McClain, and Argyll typically lied to borrowers by explicitly telling them that their collateral would not be sold unless a default occurred. However, since Argyll had no independent source of funds other than the borrowers’ collateral, Argyll often sold the collateral prior to closing the loan and then used the proceeds to fund it. Got it? Argyll gave corporate executives margin loans at 50-70% loan-to-value based on the market price of their stock (based on the volume weighted average price over five days leading up to the closing of the loan). They took the stock as "collateral." They then trousered the stock and sold it for, y'know, 100% of the market value, with 50-70% of that funding the loan and the remaining 30-50% funding miscellaneous expenses that presumably included unclothed entertainment for themselves. The loans had three-year terms and were not prepayable for 12-18 months, so the expected life of the scam was at least 12 months (but see below).