Illustrated Daily; 5046; Investment Scam/Scandal: the Dollars

Millions of state dollars are currently handled by two major banking institutions which triggered a federal investigation into state financial affairs. In the aftermath of last Thursday's indictments, should they or the Attorney General have notified appropriate state officials of suspected wrongdoing, we'll find out next on the Illustrated Daily. The Illustrated Daily, managing editor Hal Rhodes. Good evening. Last night we explored the law, the politics and the journalism surrounding the indictment last week of two top state investment officials.

Tonight an examination of the confusion, conflict and legal issues which as a consequence currently complicate New Mexico's relations with major banking institutions, including potentially the state's fiscal agent First National Bank of Albuquerque and the state's correspondent bank in New York City, Irving Trust. It was, of course, officials of Irving Trust who reportedly went to law enforcement authorities with allegations of attempted extortion on the part of state investment officials, allegations which led to last week's indictments. Interestingly, even as Irving Trust officials were participating in the probe, they continued their ultimately successful pursuit of a contract as state correspondent bank. Thus an interesting situation, the state of New Mexico is locked into contracts with two banks engaged simultaneously in the investment of state funds and in a legal proceeding almost adversarial in nature against top state officials of the state whose money they manage.

Momentarily we will be talking about this situation with New Mexico Lieutenant Governor Mike Reynolds, a member of the State Board of Finance, New Mexico Land Commissioner Jim Baca, a member of the state investment council, and Michael Messina, one of the leading business attorneys in the American Southwest. First, however, to keep our focus a bit of chronology. March 1983, the story begins when the State Board of Finance designates the Bank of Santa Faye as state fiscal agent, New Mexico's agent in handling state financial accounts. July 1983, a contract to that end is executed. August 1983, the Board of Finance approved City Bank of New York State Correspondent Bank, responsible for state investment transactions in New York City. This in a contractual relationship with the Bank of Santa Faye.

It is a troubled relationship, complicated by differences of legal opinion between the Office of Attorney General, other state officials, and the Bank of Santa Faye. June 1984, the Bank of Santa Faye gives 90 days notice it wants out of its contract to state fiscal agent. Three months later, September 1984, the Board of Finance selects First National Bank of Albuquerque as its new fiscal agent. First National wants Irving Trust as its correspondent bank in New York. The Board delays that decision. Meanwhile, sometime between July and November of 1984, Irving Trust officials go to law enforcement authorities with their now famous extortion allegations. Yet, simultaneously, Irving Trust officials continue negotiations for the contract to state correspondent bank.

Negotiations involving New Mexico officials unaware of an ongoing investigation into state financial activities for which they bear responsibility. November 8, 1984, a portion of that contract as correspondent bank is awarded Irving Trust. One month later, the state investment officer, the deputy treasure of the state of New Mexico, are indicted by a federal grand jury. And thus, back to that curious situation, today, New Mexico officials responsible for managing state financial affairs are tied by contractual relationships to a fiscal agent and a correspondent bank which failed to notify them of alleged wrongdoing on the part of subordinates, and which further triggered an ongoing federal investigation which has cast a cloud of doubt over some of those state officials themselves. I should mention we invited the president and the chief executive officer, First National Bank of Albuquerque, Mr. Norman Corzine, to participate in this evening's program.

Under the circumstances, Mr. Corzine informed us that would not be possible. However, Mr. Corzine asked that I report that he considers relations between First National, Irving Trust, and state officials at the present time to be excellent. In state land commissioner Jim Baca, you are a member of the state investment council. You have publicly stated the opinion that banking officials of at least Irving Trust and perhaps First National were under some kind of fiduciary obligation to notify you and other responsible state officials of suspected wrongdoing on the part of your subordinates. Could you explain that view for us? Well, basically, I felt that they should have contacted us whether or not there was a fiduciary responsibility. Finally, today, I found out this morning from the Attorney General Paul Bardocky that there was no legal fiduciary responsibility because no contracts had been signed. Nevertheless, I still feel-

A contract had been signed between First National, however, not Irving Trust. Let me state that we could not know what was in this investigation and all fairness to everybody. As it turns out, it did not involve the actual investment of state funds. However, I had no way of knowing that because nobody told me what was going on as a member of the investment council set up in statutes as a member of that council and I served because I am legally bound to do so. But I felt it was really strange that for a period of three weeks after statements had been taken from Mr. Trautman and Mr. Johnson and it was felt that they probably had done some wrongdoing that nobody bothered to contact any members of the investment council. I think that the banks did exactly the right thing and going to the FBI and the Attorney General's Office with these allegations. At the same time, I certainly have a responsibility in overseeing the investment funds and if the banks did not feel that they could go to anybody in the Adnai administration or anything else, I am a separate constitutional entity.

They could have come to me and I could have maybe called together a meeting of the public members of the investment council to discuss this because these are serious allegations . Well, what do you think the banks should have done? I mean, the Attorney General says he doesn't think they have a fiduciary duty to you. What do you think they should have done? Well, I think they should have contacted at least a few members of the investment council to let them know that they had some real problems. That's not to say they should have gone to the FBI because they should have but they should have come to us and say we got some problems, watch real closely what's going on in the investment council. They didn't do that. No matter what the allegations were as a member of the investment council, I should have been made aware that maybe our funds were in danger, maybe they weren't but that we should keep an eye on. All right. Let me ask you this. On this matter of obligation, fiduciary or otherwise, you have of course read the Troutman, the Johnson indictment. That now famous provisions and the complaint. All right. Well, the indictment says Johnson and Troutman did conspire and what have you to extort. With co-conspirators known and unknown, is it conceivable but that banking officials were

of the opinion that this alleged conspiracy reached throughout the entire fabric of the investment council and the state board of finance and therefore did not feel they could do that? The only thing I don't know what they thought and the only thing I think that happened was that the FBI told them not to tell anybody. I think that's what happened. And yet we have a responsibility to oversee the fund, not the FBI. Do you think the FBI had the authority to tell them that? I really don't know. You think that was responsible advice is what I'm asking you. I'm not sure. I just should have been made aware of this because I am responsible as a member of the investment councilor what's going on. Okay. Lieutenant Governor Reynolds in the State Library and Santa Fe on this program last Wednesday as a matter of fact, you expressed the opinions somewhat similar to what land commissioner Ivanka has just said that the board had an obligation to report suspected wrongdoing on the part of your subordinates. Do you think there was any legal obligation here or was it just a normal business obligation?

I don't know about the legal obligation. I'm an attorney but I wouldn't venture a legal obligation opinion on that. I don't know if there is one. But look at it as if you were in business for yourself and you managed a united widget corporation and one of your salesmen was out there telling one of your clients that to do business or to get a discount, they had to do this that or the other. As president of that corporation, you'd expect a competitor or a co-worker to let you know that one of your servants, one of the people that you're responsible for, was possibly engaged in wrongdoing. And if they were engaged in wrongdoing, then you could take appropriate action, which would probably include going to the appropriate legal authorities. But relationships in banking and in business and in politics have to a certain extent be based on trust and mutual respect.

And I share the feelings of Jim Bocker that maybe we should have been known, should have been told about this so we would have known what was at stake when, as acting governor, I got up that Thursday morning, read the Albuquerque Journal at 6.45, there was no way I could tell from reading that newspaper exactly what was at stake. And I didn't know until I got to Santa Fe that day. What exactly was at stake? I didn't know if there was an allegation of misuse of state funds, I didn't know if state investments were in trouble. And those questions were very serious to me. Now, when I found out otherwise, I did go to the press and when I accepted Mr. Trautman's request for administrative leave, I made it very clear in order to reassure the public that the charges did not involve misuse of state funds, did not involve misuse of the trust relationship to state securities or investments, because I thought that reassurance was important. And that was as much as I could do at that point in time.

All right, there is another view which has developed, as this story has unfolded, as you know, namely that the state attorney general himself, as the chief legal advisor to state agencies, the Board of Finance, the Investment Council, Lieutenant Governors, and the alike, upon learning of these allegations, had perhaps the duty, which Jim Baca just implied, namely, to report it to law enforcement officials at the federal level, but he had a simultaneous duty to advise members of his own clients, the Board of Finance and what have you, that there was suspected wrongdoing on the part of your subordinates. What do you think about that? I'm not sure how that should have been approached. It's a question that bothers me, and I think that the attorney general's behaved very well in this case. I know he's in a very delicate situation because he does serve as our attorney on the Board of Finance and also for the State Investment Council. I don't know how he could have handled it.

Maybe he didn't feel it was appropriate because there was an ongoing criminal investigation to let us know, but it seems to me there might have been a way, or there could have been a way, to let somebody administration know that we didn't have to worry about the use of state funds, the possible misuse of state funds, or the safety of state securities. Part of the problem we had during the negotiating process was the indemnification of state securities and the policy over the overnight investments, and who would be covered in case of a loss, which is a serious financial and legal problem. The attorney general was following through on that very conscientiously, but at the same time, he knew that there were possible criminal charges being filed against the deputy state treasurer and the state investment officer. There should have been some way. We need to figure out a way to ensure that state monies and the trust and the state's ability to do business are protected.

That's the main thing, the reputation of the state of New Mexico, the honesty of public employees, and the fair dealing with the business community and the private sector, the most important things that we have, and to put those kinds of things at risk are very serious indeed. One last question, same question I posed the moment ago of Commissioner Baca. Is it conceivable that banking officials, perhaps the attorney general himself, had reason to believe what were suspicious that persons, those known and unknown persons in the indictment, involved members of the Board of Finance themselves in this alleged conspiracy? I have to draw the conclusion that somebody believed that. I rather suspect the Irving trust people believed that because they didn't come to any of us. I think that that was a very gross misperception in their part and I think that it would have served them better and us better if somebody would have said, hey, is this the way you guys do business?

So we could have said no, we don't do business this way. We don't extort money from people. Well you were negotiating a contract with him, his correspondent bank or approval of that contract, all the time this was going on. Would you had you known that this was going on? Would you have wanted Irving trust to state correspondent bank? Well, see again, that correspondent bank relationship has more to do with the fiscal agent than it does with the state. It was always a show. You had approval. You had approval. We had final approval. That's right. And most banks, as I said last time I was on the program, told us they would pick another correspondent bank than their first choice if that's what we wanted to do. We assumed on the board of finance that the negotiations were going well, that the legal questions were being answered, and that the only hold up on all of this were legal questions and the finalization of a contract to bring to the board by the Attorney General. And that's all I knew about it. Now if Irving trust had come to me and said, look, we're being told that the hold up is because these guys want $2,000 from us, we could have set them straight very quickly because

that was not the truth. All right. It may have been presented that way, but that was not the truth. Okay, sir. Thank you very much. Michael Messina, you know your business law. Better than anybody of my acquaintance at least. This notion, and we've heard what the Attorney General now today told Commissioner Baca about this issue of fiduciary trust, at least between Irving trust, pardon me, fiduciary duty between Irving trust and state officials on this matter of alleged wrongdoing on the part of subordinate. I like your view. Is there a fiduciary obligation here between any of the parties, either Irving trust, state officials, first national bank, state officials, to the extent first national bank knew anything about these allegations? Let me say first that my reaction to that question and my opinion about it is based on limited factual input, but based on those limitations. I see no basis for there being fiduciary relationship between the Irving trust people and the

state board of finance. Because there was no contractual relationship at that time to my knowledge. So fiduciary duty comes only after contract. If fiduciary duty comes out of certain types of relationships because of those relationships and that's implied in law, other duties of that nature can arise out of contractual relationships that exist. Those of typical fiduciary duties or officers of a corporation to the corporation and its shareholders, attorneys to their clients, that sort of thing. But I really don't think that's the critical issue in terms of these questions. If my understanding is correct, let me say I can't say whether or not the first national bank had a fiduciary duty concerning this type of information. My guess is that it probably did not because it probably did not relate to the handling of funds with which they may or may not have a fiduciary relationship depending on the contract. But I still think it's not the key question. Because in fact, from what I understand, representatives of the bank, their lawyers,

both of the first national bank and the Irving trust, disclosed what they believed was occurring to the Attorney General in the Attorney General's office. And I believe that in except in very rare circumstances, and again, I emphasize, I don't know all the facts, that the Attorney General, as the chief legal officer of the state, as the attorney who is and whose office is representing the State Board of Finance, is involved in the negotiations and drafting of the contract and connection with the approval of the correspondent bank contract, had an affirmative duty to disclose this information to his client. And who are his clients here? His clients here are the State Board of Finance. These are the people. This is the body that is involved in the process of approving this contract. And I believe that again, there may be a set of facts under which this duty could be overridden by other considerations.

This duty is not at all, in my view, inconsistent with an obligation that the Attorney General and his office had to take steps in connection with information they had that showed that there might be a crime. Why are those not inconsistent? Can you explain that for us? Well, again, leaving aside possible scenarios that could change this, but based on the information that's been made public, the Attorney General had a duty to disclose this information to the extent he believed there was a federal offense or may have been a federal offense to the federal authorities, that in fact was done. If there were state offenses involved, he had the ability to pursue that. But that is not inconsistent with disclosing to your clients what is alleged to have occurred. He has learned facts which really can raise questions about the integrity of their process, their contracting.

He should have gone to his client, again, in the absence of other information that I don't have available to me, and a, given them this information, advised them concerning alternatives they would have to set the record straight to make sure this thing didn't go any further to preserve the integrity of that body and its contracting processes, and to allow that body his client to defend themselves against charges and implications it may grow from this, assuming this is not their conduct that's being involved. And from the indictments that came down, it appears that it was not their kind of... All right. Where does this then leave these state agencies, as far as legal counsel coming from the office of Attorney General is concerned, given the fact that now the Attorney General is also a special United States attorney involved in both the investigation and the prosecution of this case? I have personally grave, grave questions about what's going on. I want to make it clear, I like most people that I know don't condone using political power

or influence to get money in any way. But there are very grave, broad questions that go beyond the conduct of these two individuals that have been indicted. And the conduct in my view of the Attorney General raises some of those questions. What he has done by allowing himself to become a special assistant United States attorney is number one, he has left his client without representation at a very critical time when they need it the most. And sure they have resources, I suppose, to get other special counsel, but they need to know that their lawyer isn't representing them to be able to do that. He, I believe, probably should have told him in the very beginning if he had other facts that raised question about, in his mind, whether he could have disclosed to them what was going on, he should have disclosed to them that I can't represent you, I can't discuss

with you at this time. Why? You better get special counsel to help you through the rest of this process. Right now the Attorney General has left this agency without representation. Order a penance. That's right. And other agencies. And other agencies as well, which might be involved in this investigation. Mike Reynolds, may I ask what your feelings are about this matter? You do have a rather serious situation on your hands. You need legal counsel, and you have your traditional legal counsel involved in an investigation and prosecution of your subordinates. Well, the question that Mike brought up is a serious one. It's one that's been on my mind and several other people's minds. Just where do we go and what do we do? We do have contact with other attorneys. We have bond attorneys that we've been in contact with who've been engaged in dealing with state monies, and they've given us some advice. At this point in time, we've made no formal decision to seek outside counsel. I think that we need to preserve the integrity of the State Investment Council and the integrity of the Board of Finance.

But you also need legal advice, and to do that we need legal advice, you're right. And the governor made a suggestion yesterday to the press about combining all these functions, and I know as has been discussed in the past, we will at the next Board of Finance meeting discuss the possibility of getting outside counsel outside the Attorney General's office. That possibility has been discussed before, and I'm sure it's going to be brought up again. Well, what do you, what will a decision be made in the meantime? What are you doing for legal counsel? We don't have any. So you are left without legal counsels, the consequence of that. We are at the mercy of the Attorney General in terms of legal advice if we go that route. All right, I say we're on the Board of Finance itself. There are three attorneys, the governor myself and Don Montoya, so we're not exactly bereft of legal advice. What does that say, though? The attorney should never defend us. We should never defend us. All right. We don't have anything to defend against. We do need legal advice on fiscal matters, on contracts, on the effect of policies in terms of their legal ramifications. Very brief. That's serious.

Thank you, Jim Baca, you wanted to get in, you were. Well, I just want to say that we at the Investment Council do have an assistant attorney general still working with us. But he reports to the Attorney General. She reports to the Attorney General. I have all the confidence in the world in her, but I'm still a little bit drained. You share a strain. The lieutenant governor's. Right. Because I think Paul has been put into a very difficult situation. Well, let me ask you. He's not the first attorney general to undergo this. Tony did when he was AG. Dave Norvel did. He's trying, he's trying a lot of. There are a lot of ironies here. You can't serve two masters. Though, however, Jeff Binghamon did after the prison riots, consigned responsibilities for investigation and prosecutions under state law to the Santa Fe district attorney while he maintained his attorney-client relationship to the state. That's true. How do we disentangle this, Mike Messina? There are no easy answers to this. You know, first of all, my personal feeling is that I can see no legitimate need or reason for the Attorney General of the state of New Mexico to be special assistant United States

Attorney. It has been used as an argument to justify what's going on and the full scope of what's going on and the manner in which it's going on in terms of it defending it against challenges that it is a partisan attack. I believe there is a tremendous amount of partisanism involved here. I can conceive, I don't know, I can't attribute to the Attorney General what his motivations are, but I can speculate about it. Well, let's don't do that. Tell me how we disentangle this. I think the way we disentangle is I think the Attorney General should forth with, resign his position, his special U.S. Assistant Attorney General. Let them go on with their process. They might want to look in to the same kind of conduct engaged in by the Republican Legislative Campaign Committee that they're looking at. It's curious and it's kind of embarrassing, I'm sure, to well thinking Republicans to

see part of what's going on. It doesn't mean that what these people are accused of having done, that is these two people are accused of having done is okay. I'm not saying that at all. I understand, but so you are the opinion. Do you think Lieutenant Governor Reynolds, that the State Attorney General ought perhaps resign his position as special Assistant United States Attorney and return to his duties as legal counsel to the state, or is it too late for that in your opinion? It may be too late. I think that the Attorney General's office has been involved in this investigation for a long time. I appreciate Mike's sentiment, I appreciate the point of view and I sympathize with the situation that Paul's in up to a point and that's about all I can say. That gentleman, our time is up, we're going to have to leave it at that, I really appreciate you coming by. So there we have it, with this edition of the Illustrated Daily, we temporarily put this investment scandal story to bed, but as events warrant, we will pick it up again on future programs. Tomorrow, New Mexico Indians attempt to take control of their economic destiny. Meanwhile, thanks for joining us.

I'm Hal Rote. Good night.