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From Securities Regulation Daily, October 21, 2016

SEC sufficiently alleges nexus between pay-to-play scheme and securities fraud

By Kevin Kulling, J.D.

A federal court has denied a request by a lawyer-lobbyist to dismiss an SEC securities fraud complaint against him in connection with alleged illegal campaign fundraising and kickbacks involved in the re-election campaign of Ohio’s former state treasurer. Finding that some "pay-to-play" allegations were sufficiently "in connection with" a securities transaction, the court allowed the civil action to move forward (SEC v. Robert Crowe, October 20, 2016, Marbley, A.).

Campaign for Ohio Treasurer. The allegations involve State Street Bank and Trust Company’s bid to become a "subcustodian" for Ohio public pension funds that were under the care of the state Treasurer’s office. In an attempt to secure the subcustodian business, a senior vice president at State Street hired an immigration attorney and friend of the deputy Ohio Treasurer as a lobbyist for State Street. The attorney paid approximately half of the money he obtained from State Street to the Ohio Deputy Treasurer, Amer Ahmad.

According to the allegations, Ahmad told State Street that they also needed to make significant cash contributions to the election campaign fund of the treasurer. To assist with that request, State Street hired Robert Crowe, a well-known fundraiser and lobbyist.

Crowe allegedly wrote a check to the campaign for the maximum individual campaign contribution allowed, or $11,300. Crowe also put together contributions from others and after submitting the contributions to the campaign, Crowe allegedly reimbursed the donors through his personal bank account. He did not inform the campaign that he had filtered State Street funds through his own bank account or that he had reimbursed others for their contributions.

After Crowe facilitated additional similar contributions, the deputy treasurer awarded three Global Custody Contracts to State Street. In executing the contracts, State Street failed to mention the kickbacks or the campaign contributions that were filtered through Crowe’s bank account. State Street also certified that it "had not and would not provide any public officials or employees with anything of value as to manifest a substantial and improper influence with respect to that person’s duties."

"In connection with." The SEC alleged Crowe was liable for fraud as well as aiding and abetting. Crowe challenged the securities fraud allegations, contending that the complaint failed to state fraud "in connection with" a securities transaction. As to the aiding and abetting claims, Crowe did not challenge the allegations that State Street made misrepresentations or omissions of material facts with scienter, he only challenged whether the misrepresentations or omissions occurred in connection with an offer, sale, or purchase of securities.

Crowe argued that the alleged misrepresentations were made to facilitate State Street’s receipt of contracts to be a subcustodian service provider. Because the subcustodian provided ministerial services rather than discretionary brokerage services, Crowe argued that State Street’s conduct did not make the required connection.

The SEC on the other hand argued that the subcustodian provided services that were "inextricably intertwined and integral to facilitating and effecting transactions in securities on behalf of the pension funds: safeguarding assets, providing recordkeeping services, accepting and delivering cash and securities, and effecting settlement of the funds securities transactions in addition to investing the pension funds cash balances by purchasing short-term investment securities."

The court agreed that the custodial services that State Street provided were sufficient to satisfy the required nexus with securities transactions. Crowe participated in a corrupt scheme to influence the Treasurer’s office to select and retain State Street as the subcustodian by repeatedly causing concealed campaign contributions to be made on behalf of State Street to the Treasurer, the court said, and the complaint sufficiently alleged Crowe’s fraud to have coincided with the purchase or sale of securities because the fraud involved influencing the Treasurer’s choice of subcustodian.

Scienter. Crowe also challenged whether the complaint adequately alleged the existence of scienter. Crowe argued that the SEC did not allege that he read or was aware of the content of the contracts containing State Street’s alleged misrepresentations.

The court said that Crowe had general awareness that his role was part of an overall activity that was improper. Filtering illegal payments to the campaign through his own bank account and reimbursing campaign donations constituted extraordinary conduct, the court said. Crowe’s extraordinary conduct, in light of the fact that he was an experienced fundraiser, paired with allegations that he knew that State Street was improperly using illegal campaign contributions and kickbacks in exchange for state business, showed he was aware that his actions in facilitating the illegal campaign contributions were improper. The court said he also took pains to cover his tracks, which constitutes sufficient evidence of general awareness to survive a motion to dismiss, the court said.

The case is No. 16-cv-00036.

Attorneys: Daniel J. Hayes for the SEC. Charles Rockwell Saxbe (Taft Stettinius & Hollister LLP) for Robert B. Crowe.

MainStory: TopStory Enforcement FraudManipulation OhioNews

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