Attorney General Gary King says that the state should not be responsible for the legal fees incurred by former Educational Retirement Board member Bruce Malott.

Malott has racked up at least $300,000 in legal fees using a private attorney. King’s office says that the state isn’t on the hook for the private attorney because the state is already providing Malott with a state lawyer.

“Reading Section 22-11-13(H) in light of the other statutes that provide legal representation to state officers and employees, we do not believe it requires the state to reimburse Mr. Malott and other ERB members for expenses resulting from privately retained counsel, particularly when an attorney has been made available at state expense through RMD,” the opinion by King says.

Malott has also hired a public relations firm to help him.

Malott quit from the ERB after media asked him about a $350,000 loan he received from Anthony Correra, the father of Mark Correra. Mark Correra received $22 million in third-party marketing fees from the state.

The Independent reported at the time:

Malott is no newcomer to controversy. Last year, as The Independent reported, federal investigators subpoenaed “e-mails, including attachments, to or from Bruce Malott from Jan. 1, 2003 to the present” as part of a wide-ranging criminal inquiry related to New Mexico investment deals. Malott also is a defendant in an ongoing lawsuit brought by ERB’s former investment officer, Frank Foy, who has alleged a pay-to-play culture at New Mexico’s investment agencies.

Last year The Independent noted how Malott’s auditing firm, Meyners + Company, had grown from a bit player to a powerhouse in New Mexico government while Bill Richardson was governor.

The Attorney General’s opinion also says that the state is not responsible for any of the expenses Malott has related to the public relations firm he hired or any other “non-legal” expenses.

The campaigns of Democratic Lt. Gov. Diane Denish and Republican Susana Martinez found themselves trading accusations over the abrupt resignation of Bruce Malott as chairman of the Educational Retirement Board (ERB). Malott admitted to borrowing $350,000 from the father of a man who had shared in $22 million in so-called third-party marketing fees, the Albuquerque Journal reported Thursday.

The fees are part of an ongoing federal criminal investigation and came from dozens of investment deals involving the State Investment Council and the ERB, which Malott helped to oversee as chairman.

“It is clear that the culture of corruption is deeply rooted in the Richardson/Denish Administration and we are finding more conflicts and wrongdoing every day,” Martinez’s campaign manager, Ryan Cangliosi, said.

Cangliosi went on to accuse Martinez’s Democratic opponent of standing by Gov. Bill Richardson and of having “strong ties with almost all the individuals making headlines for their crooked deals, which have held New Mexico back.”

A spokesman for Denish responded in kind, accusing Martinez of hypocrisy.

“Susana Martinez is the last person in New Mexico who should be giving lectures on ethical conduct in government,” Denish spokesman Chris Cervini said late Thursday. “In just the past few weeks, New Mexicans learned that Martinez spent their tax dollars on big Wall Street style bonuses for her employees and gave away a $60,000 no-bid deal to her friend.”

In addition to saying she was “angry and disappointed,” Denish’s campaign said she donated $4,100 in campaign contributions from Malott to Teach scholarships, which help early-childhood educators increase their skills and training.

Since June, Martinez has repeatedly attempted to link Denish to Richardson and his administration’s numerous scandals, from pay-to-play allegations, federal criminal inquiries and charges of cronyism.

The question is, with two months to go before the November election, does another headline-grabbing scandal strengthen the Martinez campaign’s strategy?

“All of these stories that we have been seeing related to investment and state’s management of investments, they have a cumulative affect over time, but no one story does the trick,” pollster Brian Sanderoff of Research and Polling Inc. told The Independent on Thursday. “There’s this guilt by association that can be effective if people buy its veracity.”

Creating such a connection is common practice in politics, Sanderoff added, particularly “if you have a governor with low approval ratings,” such as Richardson.

The cumulative effect of the scandals can harm the Democratic gubernatorial candidate if the Republicans are successful in making sure to exploit the situation, Sanderoff said.

The role of a lieutenant governor in state government

The efforts to link Denish to Richardson exposes a central question: how close are Denish and Richardson and did Denish know the inner workings of Richardson’s administration.

The answer is unclear. The two have feuded publicly on occasion, but more often than not have worked as allies through much of the last eight years.

But just  because a person is lieutenant governor doesn’t mean they’re in the room when the important decisions are made, one former governor said.

“In terms of decision making, the day-to-day activities, I’m reminded of the old adage, that the main job of the vice president is to get up everyday to see if the president is still alive. And if he is, then go back to bed,” said former Gov. Toney Anaya, a Democrat and Richardson appointee.

The statement summarizes a lieutenant governor’s responsibilities, Anaya said.

“In my own experience, and from what I’ve seen of other governors, a lieutenant governor participates only in what activities they are invited to,” Anaya said. Anaya added that he thought laying the blame of  a governor’s record on his lieutenant governor didn’t reflect the day-to-day reality of the officials’ relationship.

But former Republican Gov. Gary Johnson said Thursday that his lieutenant governor, Walter Bradley, “was intimately involved” in his administration.

Johnson said he relied on his lieutenant governor, adding “my door” was always open to Bradley.

“When you run for lieutenant governor I think your expectations are that you are involved in everything that is happening,” Johnson said. “From my standpoint I wanted to involve him in everything.”

It remains to be seen how effective Martinez’s strategy to tie Denish to the scandals will be in the weeks leading up to the November election. One thing is certain however: her campaign has much to work with.

“When I learned about this loan in today’s paper, it made me angry and disappointed — and New Mexicans have every right to be angry about this as well,” said Denish. “Obviously Mr. Malott knew this was a clear conflict that should have been disclosed. He should have disclosed it and resigned a long time ago.”

We’ll post Republican gubernatorial nominee Susana Martinez’s statement regarding the situation when we get it.

Malott acknowledged to the Journal receiving a $350,000 loan from Anthony Correra, father of Marc Correra who shared in the fees paid out from dozens of investment deals involving the ERB and the State Investment Council.

Malott told the Journal he had no idea at the time that Marc Correra was receiving the fees from the ERB, an agency he was charged with helping to oversee.

Malott is no newcomer to controversy. Last year, as The Independent reported, federal investigators subpoenaed “e-mails, including attachments, to or from Bruce Malott from Jan. 1, 2003 to the present” as part of a wide-ranging criminal inquiry related to New Mexico investment deals. Malott also is a defendant in an ongoing lawsuit brought by ERB’s former investment officer, Frank Foy, who has alleged a pay-to-play culture at New Mexico’s investment agencies.

Last year The Independent noted how Malott’s auditing firm, Meyners + Company, had grown from a bit player to a powerhouse in New Mexico government while Bill Richardson was governor.

Since Richardson took office in 2003, the Albuquerque-based auditing firm where Malott is a principal, won nearly $7.8 million in public auditing contracts, according to state records, compared to $274,000 in such work the firm did in the five years prior to 2003.

Malott is a Richardson friend who was treasurer of Richardson’s 2002 gubernatorial primary campaign and has been appointed to a number of state boards during Richardson’s tenure as the state’s chief executive. Another principal in Malott’s firm acted as treasurer for Richardson’s gubernatorial bids in 2002 and 2006, as well as his presidential campaign, election records showed.

Richardson appointed Malott to the ERB board.

The ERB sent out a late-morning new release announcing that Mary Lou Cameron, the board’s vice chairman, would replace Malott temporarily as board chairman until members elect officers at an upcoming meeting.

“We’re waiting to get hearings,” Victor Marshall said, referring to a legal complaint his client has filed in the 1st Judicial District Court in Santa Fe.

The state is defending former State Investment Officer Gary Bland against Foy’s complaint that he participated in fraud against the state that resulted in the loss of taxpayer money.

The state also is defending Educational Retirement Board (ERB) chairman Bruce Malott in a separate suit brought against the ERB for refusing to turn over what Foy and Marshall say are public records, according to an amended version of Foy’s complaint filed last week in a state court in Santa Fe.

Marshall said the state should stop footing the bill for those officials.

So far the state has spent hundreds of thousands of dollars defending itself against the Foy complaint.

That led state Sen. John Ryan, R-Albuquerque, to introduce legislation during the 30-day regular session that would have prevented the state from defending an employee if the state is also the one bringing the charges. That legislation died during the session.

Opponents of Ryan’s bill said public officials, including board members, need to be protected from paying legal costs resulting from actions taken in their roles as public officials. Otherwise it would be difficult to recruit people to serve on boards and commissions, they said.

But Marshall said Tuesday the state shouldn’t defend those who helped “steal” from the state. No one has been criminally charged or convicted from the actions Foy’s suit scrutinizes, although some of the allegations appear to have interested federal authorities.

The State Investment Council, which Bland led when he was the State Investment Officer, is at the center of a federal criminal probe and a federal securities investigation.

Foy is suing on behalf of the state by using a 2007 state law to sue several financial firms, public officials and others to try to recover taxpayer money that the former ERB investment officer says was lost because of fraud.

The state could potentially recover hundreds of millions of dollars under a provision in the 2007 that allows for the collection of up to triple the amount of money lost because of fraud.

Foy and Marshall estimated Tuesday that the state has lost $288 million due to fraud, up from the initial $90 million Foy alleged in his original complaint filed in July 2008.

That means if Foy proves his case a court could award more than $800 million. Foy and Marshall would collect a portion of that award.

The subpoenas were released by the Educational Retirement Board on Thursday afternoon. They show that federal authorities demanded all agency contracts with Aldus as well as correspondence between the state agency and Aldus and any list of firms Aldus proposed that the ERB invest in.

Also of interest to authorities, according to the two subpoenas, were all “e-mails, including attachments, to or from (ERB chairman) Bruce Malott from Jan. 1, 2003 to the present.”

The subpoenas show the federal investigators’ interest in Aldus. Five of the 14 items enumerated in the two subpoenas mention Aldus, including a demand for any documents generated by Aldus Equity that are in the possession of the Educational Retirement Board.

The State Investment Council and the Educational Retirement Board fired Aldus as investment adviser earlier this year about the time Aldus’ founder, Saul Meyer, was indicted in an ongoing New York investigation involving pay-to-play allegations.

That New York inquiry has unearthed what that state’s attorney general has called questionable practices here in New Mexico.

Among the allegations were that Meyer helped the son of the New York state comptroller, Alan Hevesi, win a lucrative contract in New Mexico for a firm he was representing in return for Aldus’ increased business in New York, according to the New York criminal complaint.

At the time, the comptroller’s son, Dan Hevesi, was acting as a third-party marketer. Meyer was charged in the New York criminal probe.

The charges against Meyer have thrown into question whether Aldus – which as the state’s investment adviser was supposed to vet the safety and risk factor of state investments — had always acted in New Mexico’s best interest, officials said.

The subpoenas made public Thursday also show that beyond Aldus federal authorities cast a wide net into ERB’s investment activities.

In addition to Aldus-related documents sought, federal prosecutors used the subpoenas to demand any contracts between the Educational Retirement Board and “any firms, individuals, or entities investing funds or providing investment advice to or on behalf of the ERB.”

Documents listing brokers, placement agents or third-party marketers associated with those investment firms were also demanded.

Third-party marketers, once obscure figures in the investment world who act as matchmakers between private equity and hedge funds and states looking for a good return on their money, have been prominent in New Mexico news lately, mainly because of the millions of dollars paid out to them, including $16 million that the son of a friend of Gov. Bill Richardson has shared in over the course of several years.

Of that $16 million, Marc Correra — who is the son of Anthony Correra, a friend and fundraiser for Richardson – received $2 million for an investment that ultimately soured and cost the state its original investment of $90 million.

Correra’s name does not appear in the subpoenas.

The first subpoena, which the ERB received May 6, lists most of the demands for documents related to investments, third-party marketers and Aldus.

A second subpoena, faxed to the state agency May 27, sought only the “e-mails, including attachments, to or from Bruce Malott from Jan. 1, 2003 to the present.”

The ERB initially refused to release the subpoenas to media outlets that sought copies through a state public records law. But the agency reversed itself this week and released them to the New Mexico Independent and other media outlets.

“I was very well aware that the second subpoena requested my ERB e-mails before I requested ERB staff to reconsider their position (to not release the subpoenas publicly), and, from the beginning, I thought (the subpoenas and e-mails) should be disclosed,” Malott said Thursday afternoon.

“I am proud of our superb ERB staff for reconsidering their position on the subpoenas,” Malott added. “Sunlight is the best disinfectant, and I continue to believe the public’s right to see their government at work should never be marginalized.”

Malott declined to comment on whether he’s a target of the investigation.

The State Investment Council also has received a federal subpoena but so far has refused to make it public.

On Thursday, a spokesman for that agency had no comment on the ERB’s decision to release the federal subpoenas.

The governor’s office did not respond to an e-mail asking for a response to ERB’s decision.

The subpoenas show that ERB was commanded to appear with the documents before a grand jury June 9.

Here they are: click here and here to look at them.

The State Investment Council, headed up by Bland, and the state’s Education Retirement Board invested a combined total of $90 million with Chicago-based Vanderbilt Capital in 2006. That investment ended up being essentially worthless.

Foy, a former investment officer at the ERB, says he was pressured by board chair Bruce Malott to make the investment in Vanderbilt, and that Vanderbilt’s subsequent donation of $15,500 a couple of months later to Gov. Bill Richardson’s presidential campaign shows that the investments were made in exchange for campaign contributions. Foy’s suit names Richardson’s former chief of staff, Dave Contarino, as the person who was directing Bland and Malott to ensure that the investments happened.

If his lawsuit is successful in civil court, Foy will get a percentage of the proceeds recouped for the state — the result of a whistle-blower law passed by the Legislature just a few years ago.

Accused parties have denied the charges, saying that Foy is a disgruntled former employee who was fired after being found guilty on three charges of sexual harassment. And Malott says Foy’s suit was an attempt to “exploit headlines” coming on the heels of a federal pay-to-play investigation of Richardson’s administration, given a “personal vendetta” Foy has after being fired by Malott.

Now, according to the Associated Press late last week, Bland says that Foy’s lawsuit is a “cynical” attempt to profit from financial distress, and he details his own credentials to make the case that he wasn’t hired for political reasons:

“This lawsuit is a cynical attempt… to make money out of the near collapse of worldwide financial markets and the resultant devastation that event has caused to some of the investments held on behalf of the people of New Mexico,” Bland wrote.

… The response cites Bland’s “unblemished career as a fiduciary,” including 16 years as vice president of trust investment at the Boeing Co., where he oversaw $62 billion in employee trust funds.

Bland, also pleading ignorance of Vanderbilt’s campaign contributions to Richardson, says the Vanderbilt investments were “scrutinized, approved in the normal course and ultimately made because of Vanderbilt Capital’s experience.”

The AP reports that, according to Bland, that experience included $16 billion in assets, 45 institutional clients and a management team with 60 years of combined experience and a strong performance record.

Bland was hired by Richardson in 2003 after retiring from Boeing in 2001. In a press release announcing the hiring of Bland, Richardson said he had “… ambitious plans for the State Investment Office, and I wanted a leader who will take the office in a new direction… I got exactly what I wanted in Gary Bland.”

Photo by Heath Haussamen

Five independent audits of the state’s affordable housing system turned up none of the widespread problems that led to its scandalous and nearly total collapse in 2006, a review of public documents reveals.

The five audits, completed by the firm Meyners + Company, didn’t flag any of the major problems that preceded the Albuquerque-based Region III Housing Authority’s default on $5 million in bonds it owed the state.

Meyners’ attorney says the company became aware of problems in early 2006, but by the time Meyners says it first notified the state auditor in writing of troubles on May 31, 2006, two newspapers had already reported on alleged misconduct and the attorney general was investigating possible fraud.

In addition, the system was already collapsing. Region III defaulted on the first of two $2.5 million bonds on the same day Meyners says it sent its letter to the state auditor.

Meyners’ largely clean audits raise questions about how well the company did its job. The state auditor and State Investment Council (SIC) have both since released damning reports about the operations of the housing authorities during the time Meyners was conducting its audits. The state auditor found that, whether due to corruption, ineptitude, mismanagement or other factors, the authorities were running amok with public money and there were inadequate controls in place to stop it.

Frances Williams, a former board member for the Las Cruces-based Region VII Housing Authority and the whistleblower who first revealed problems to the public in early 2006, said she believes the Meyners audits should have found those problems.

“I most certainly do,” she said.

But Meyners’ attorney Sam Bregman defended the firm’s performance, saying the financial audits conducted by the firm weren’t intended to serve as rigorous inquiries known as forensic audits.

“I think Meyners + Company did their job correctly and appropriately, and when they determined something was wrong (in 2006), they ceased working for them because they lost faith in the Region III Housing Authority and notified the state auditor,” Bregman said.

The questions about Meyners’ performance on the housing authority audits come as the firm’s managing principal, Bruce Malott, is battling allegations from a former state investment officer that he used his position on a state board to reward campaign contributors to Gov. Bill Richardson with state investment contracts. Malott denies the allegations.

The problems at the housing authorities are at the heart of a criminal investigation by the state attorney general, who is preparing to take the case before a grand jury. AG spokesman Phil Sisneros said the fact that some of the Meyners audits were not completed in a timely manner “is part of what we are investigating.” He said he could not comment further.

Bond money spent improperly

The Meyners audits include financial statements provided by the housing authorities. Those statements reveal that Region III was using “long-term debt” — the bond money, according to Bregman — to finance its operations, and was loaning hundreds of thousands of dollars to some other regions to fund their operations.

This was a clear violation of the terms of the bonds, which were to be spent directly on affordable housing.

But Meyners never indicated in its audits that the way the bond money was being spent was problematic. In fact, the audits all gave “unqualified” opinions about the financial statements, meaning the auditor found the statements to be accurate, presented fairly and in compliance with standard accounting principles.

The bonds had been used improperly since at least 2004. Between 2004 and 2006, Meyners completed two annual audits for Region III, two for Region VII and one for the Grants-based Region I authority. At the time, Regions I and VII were using bond money loaned by Region III to fund operations.

None of those audits includes a finding about the bond money being spent improperly.

In fact, the audits of regions I and VII contain no findings at all. Meyners’ audits of Region III for the 2003 and 2004 calendar years revealed a handful of minor findings — that audit reports weren’t being completed in a timely manner, some bank deposits were not fully collateralized and the authority wasn’t tracking employees’ annual leave.

“Clearly the [Meyners] audits didn’t uncover all of the facts,” said Lt. Gov. Diane Denish, who has championed housing authority reform in response to the scandal.

Asked about that, Bregman repeated his statement that Meyners became aware of the problem with how the bond money was being spent in 2006 and told Region III that it needed to secure other funding for operations.

Region III ignored the concern, Bregman said, so Meyners quit the job and notified the state auditor of the problem.

Letters paint a different picture

But written correspondence between the firm and state agencies, provided by Meyners, makes no mention of the problem with the way the bond money was being spent.

The May 31, 2006, letter from Meyners to Vincent “Smiley” Gallegos, who was then the Region III director, puts in writing what Meyners staff had told Gallegos during a meeting held the day before: that the company was postponing its audit of Region III’s 2005 books.

In the letter, Meyners expressed concern about the AG probe, the financial stability of Region III and the possibility that it might default on the bonds. The letter also lists findings that the firm had identified by that point in the 2005 audit, including inadequate listing of fixed assets such as property, untimely bond repayments and inconsistent recording of home sales.

Missing from the letter is a finding that Region III had been improperly spending bond money on operations. No correspondence provided by Meyners or the state auditor indicates that such notification ever occurred.

The letter is dated the same day that Region III defaulted on the first of the two state-owned bonds.

The letter indicates that a copy was sent to then-State Auditor Domingo Martinez, but the state auditor’s office does not have a copy of the letter and said it can’t determine whether it ever received it.

Meyners never completed Region III’s 2005 audit. On Nov. 17, 2006, following the bond defaults, the release of the SIC report and a great deal of media coverage, Meyners sent a letter to Martinez notifying him that the company was quitting the job. Despite Bregman’s claim, the letter didn’t cite frustration with Region III’s unresponsiveness as the reason.

Instead, the Meyners letter states that the company believes “the current circumstances (newspaper articles and various other external reports) interfere with our ability as auditors to form independent and objective opinions and conclusions.”

Financial versus forensic auditing

In defending Meyners’ work, Bregman said it was a Meyners auditor who, several years ago, uncovered the fraud that occurred during the construction of the Bernalillo County Metropolitan Courthouse, which led to the convictions of former Senate President Manny Aragon and others.

In the metro court situation, the Meyners auditor was doing forensic work, which includes significant investigation and is intended for use in a legal proceeding.

That’s different from the financial audits of government agencies conducted each year, such as those Meyners did for the housing authorities, Bregman said. Financial auditing is primarily a review of financial statements, he explained.

“You’re not looking for criminal activity in there, you’re just looking to see if the books match up,” Bregman said.

But financial audits are nonetheless expected to help root out fraud, waste and abuse. The state auditor rule — which lays out requirements of firms that audit government agencies in New Mexico — makes clear that there’s more to a financial audit than a review of financial statements.

One provision requires that independent auditors check compliance with a number of state laws, including those related to the conduct of government officials and the investment of public money.

Auditors must also create a plan to “provide reasonable assurance” that financial statements don’t contain errors or fraud and document their consideration of the possibility of fraud.

And, according to the rule, they must “notify the State Auditor immediately, in writing, upon discovery of any possible criminal statute violation” they discover.

Bregman said Meyners “complied with all statutes and rules in performing its engagement in the Region III matter.”

“[Meyners' auditors] interpret the provisions and the rules very conservatively and, regardless of whether a potential crime was involved, they report to the client or the state auditor any transaction that may be in violation of some legal or contractual obligation,” he said.

Media revealed problems before Meyners

Disclosure of the problems with the housing authorities didn’t wait for Meyners’ May 31 letter to Region III — the letter that indicates a copy was also sent to the state auditor.

During the spring of 2006, Williams, the housing authority whistleblower, was complaining to anyone who would listen about problems with Region VII.

Weeks before Region III defaulted on the first of its two state-owned bonds, this reporter authored an article, published in The Las Cruces Sun-News March 12, 2006, that detailed alleged problems with Region VII. In that article, Williams accused Gallegos of fraud based on a letter from the AG alleging that a company Gallegos set up to work with the authorities was improperly operating as a nonprofit. Williams also accused Gallegos of buying homes to resell them for a profit instead of for the benefit of low-income New Mexicans.

And then-Region VII Board President Bennie Barreras alleged that almost $50,000 could not be accounted for.

None of those concerns was reflected in the 2005 Meyners audit of Region VII, which was completed at the end of January 2006 but not submitted to the state auditor until May 2006.

Next came an April 3, 2006, Albuquerque Journal article detailing the allegations of fraud. Two days later, Richardson ordered a performance review of the housing authorities.

Throughout that time, Meyners didn’t notify the state auditor in writing of any concerns.

From there, things moved quickly toward the first bond default on May 31, which is also the day — according to Meyners — of the first official correspondence with the state auditor about any problems. Within three months, Gallegos had resigned, several of the authorities had shut down, the SIC had released its report and the AG probe had become a broad, criminal investigation.

The audits

Here are the Meyners audits:

• Region I, 2003-2005

• Region III, 2003

• Region III, 2004 (Part 1)

• Region III, 2004 (Part 2)

• Region VII, 2003-2004 fiscal year

• Region VII, 2004-20-05 fiscal year