Hedge fund could lose millions for campaign violation
Contribution to gubernatorial candidate violated “pay for play”
A $500 CAMPAIGN donation to a family friend running for Massachusetts governor could potentially cost a New York hedge fund millions of dollars in its management fees of investments from the state’s pension fund.
Pershing Square Capital Management, run by activist investment billionaire William Ackman, faces the loss of two years of management fees because one of its former employees made the donation in 2013 to the campaign of Juliette Kayyem when she was running for the Democratic nomination for governor.
Paul Hilal, at the time an investment analyst for Pershing, made the donation in violation of federal restrictions governing “pay for play” as well as the company’s internal policies on political contributions. Hilal made the donation in response to an email plea from Kayyem’s sister, who was a friend of his. He did not initially report the contribution as required by regulations.
According to Securities and Exchange Commission regulations, there are no prohibitions on campaign donations but any investment firm or their employees involved in advising clients are required to take a two-year “time out” from managing any government fund that has any connection to a candidate to whom they donate in order to avoid the appearance of impropriety. In Massachusetts, the governor appoints members of the Pension Reserves Investment Management Board, which oversees the retirement funds and hires investment firms.
“I’m not worth it,” said Kayyem, who said she was shocked that “such a little amount” could cost the firm millions of dollars. Kayyem said she sent a check to Hilal for $500 in July shortly after he contacted her about the issue but she was unaware of the fallout.
“I feel horrible,” she said, adding she’s never met Halal. “I saw the donation and I asked, ‘Who is this nice person who gave me money?’ I’m sure it was just done in good faith. He wouldn’t know me from Adam.”
A spokesman for the SEC had no immediate comment. Eric Convey, a spokesman for the PRIM board, confirmed Pershing is one of 28 hedge funds managing investments for the pension fund. He said Pershing was given an initial $25 million commitment in 2011 but declined to say if there have been any additional monies invested with the firm.
“We do not report new commitments or redemptions once an initial commitment has been made,” Convey said in an email. “Pershing remains a PRIM manager.”
Convey also declined to say what the fee arrangement is with Pershing. While current fee arrangements vary, at that time it was typical for hedge funds to be paid a 2 percent management fee on the commitment and then 20 percent of the profits of the investment.
In its appeal, which was filed in September but just made public Tuesday, Pershing says such a penalty would be “thousands of times the amount” of the initial $500 contribution, making the loss in the millions or, potentially, tens of millions of dollars.
In seeking an exemption, Pershing claims Halal was not a “covered” employee because he was not an executive of the firm nor an advisor and his contribution was based on his personal relationship with Kayyem’s sister, not his employment. The company also says had Halal sought guidance form the company’s compliance office, he would have been told there was a $150 limit, bringing the actual violation to $350.
Under the SEC “time out” regulation, an exemption can be granted if the contribution is less than $350; the violation was discovered within four months; and the contribution was returned by the candidate within 60 days of discovery. The contribution was not discovered until earlier this year, nearly three years after it occurred, and the donation exceeded the maximum allowed, though Kayyem did return it within the 60 days of discovery.
The firm’s lawyers said the size of the donations combined with the mitigating personal circumstances and the fact the violation was self-reported should be enough for the SEC not to levy such Draconian measures.“The policy underlying the rule is served by ensuring that no improper influence is exercised over investment decisions by government entities as a result of campaign contributions, and not by compelling disgorgement of compensation as a result of unintentional violations,” the lawyers wrote.