Non-cash 'pay to play' risks loom

Private equity firms should ensure they have compliance programs that address non-cash contributions in their pay-to-play provisions, according to a client memo from law firm Ropes & Gray.

In September the US Securities and Exchange Commission (SEC) announced a pay-to-play case against Goldman Sachs and a former vice president in Goldman’s Boston office, Neil Morrison, for non-cash political contributions.

The case related to Morrison giving, then-Massachusetts state treasurer, Timothy Cahill support during Cahill’s candidacy for Massachusetts governor. Morrison worked on Cahill’s political campaigns using his Goldman office and resources, including the firm’s phones and email, to conduct campaign activity. 

The SEC alleged that such activities disqualified Goldman from 30 underwritings of certain Massachusetts municipal issuers in the following two years under Municipal Securities Reporting Board Rule G-37, according to the memo.

While no Advisers Act rule – the law that governs newly registered private equity firms – was implicated in this particular case, GPs are prevented from providing certain services to a government entity much in the same way. 

Goldman agreed to settle the case by paying $7.5 million in disgorgement, covering the fees from all of the underwritings, plus interest. And the largest penalty imposed by the SEC for Municipal Securities Rulemaking Board pay-to-play violations: $3.75 million.