Gov. Bill Richardson's administration is facing another allegation of pay to play.

A lawsuit unsealed in state District Court on Wednesday morning alleges state taxpayers were defrauded of $90 million by a host of financial companies and two state officials. Among the defendants are State Investment Office and Educational Retirement Board officials, including Gary Bland, who was appointed by Richardson, and Bruce Malott, ERB chairman.

The lawsuit, filed by Frank Foy, the former chief investment officer at ERB, alleges Bland and Malott were instructed by an unnamed "John Doe # 2" to invest with Vanderbilt Financial and associated companies in exchange for political contributions from the firm's employees. According to federal campaign finance records, Vanderbilt, its employees and their families contributed more than $15,000 to Richardson's presidential campaign.

The identity of John Doe No. 2 has not been released. Foy's lawyer, Victor Marshall of Albuquerque, said that person is named in documents that are still sealed, but the name is being kept secret because it is "sensitive."

Marshall said Foy's lawsuit was filed in July under the new state Fraud Against Taxpayers Act, which requires suits initially to be sealed.

"The governor is confident that the state agencies named in this lawsuit acted properly and in the best interest of New Mexicans," said Gilbert Gallegos, a Richardson spokesman. "This lawsuit, filed by a disgruntled former employee who was accused of serious misconduct during his time as a state employee, makes absurd claims against state agencies. The state will vigorously defend those agencies."

Malott and a spokesman for Bland also denied wrongdoing.

At the heart of the complaint is an allegation that the state invested $90 million with Vanderbilt companies, $40 million from ERB and $50 million from SIC. The state received dividends from the investment totaling about $3.7 million. But sometime since May 2007, "Vanderbilt has informed the ERB and the SIC not to expect any more from its investment," the lawsuit claims.

Pay-to-play allegations against the Richardson administration caused the governor to withdraw as President-elect Obama's commerce secretary nominee. A federal grand jury is investigating how a major Richardson political contributor, CDR Financial Products, was awarded lucrative state transportation contracts.

"It was my job at the Educational Retirement Board to act as a prudent fiduciary to protect schoolteachers' retirement money," Foy said in a statement Wednesday. "But teachers and taxpayers have lost millions due to pay-to-play practices that benefited Gov. Richardson and his campaigns. Our primary goal is to restore the lost funds to their respective owners: taxpayers, teachers, and retired educators here in New Mexico."

Foy worked at ERB from 1996 until 2007.

"Beginning in 2003," the lawsuit says, "the ERB was pressured to award contracts and make investments with persons or entities based upon political considerations. These pressures were exerted by Bruce Malott on instructions from John Doe #2 (and perhaps others). This was a plain violation of the fiduciary duties owed by the ERB to its members."

Richardson became governor in 2003.

According to the suit, in early 2006, Patrick Livney of Vanderbilt began to call Foy and Malott, pressuring Foy and his staff to invest with Vanderbilt. Foy said the type of investment offered by Vanderbilt "was not a good investment, and it did not fit in ERB's portfolio." Foy "vigorously resisted," as did other staffers, the suit says, but Malott insisted.

In May 2006, the board voted 4-2 to invest in Vanderbilt. "The directors selected by public school teachers voted against the investment. The directors who voted for the investment were swayed by improper considerations," According to the suit, those members "voted for the Vanderbilt investment on instructions from Malott and/or John Doe #2 (and perhaps others)."

The lawsuit says there were other instances in which Malott "pressured the ERB to hire investment managers who were not the best qualified candidates, or to make investments." The suit doesn't specify these cases.

"Malott's actions were intended to gain business and political favor for himself and Meyners, as part of Meyners' efforts to develop its accounting business," the lawsuit says. Meyners and Co. is Malott's Albuquerque accounting firm.

"Malott's actions were a deliberate breach of the strict fiduciary duties which he owed to the ERB and ERB retirees," the suit says. "Malott's actions were not within the scope of his duties as an ERB board member; those duties do not include raising political contributions and developing business for his CPA firm."

The suit says on several occasions after the state invested in Vanderbilt, "the defendants knowingly made false statements about the investment and the underlying assets and liabilities. These false statements were designed to conceal and misrepresent the fact that the State's investment was virtually worthless."

Foy, who eventually was demoted and, he says, forced to retire, was the subject of a sexual harassment suit in 2007. "These accusations," the suit claims, were "clearly contrived to force Mr. Foy to retire."

Foy said at a news conference Wednesday that the state ruled against him on the sexual harassment charges. He said the charges revolved around comments he made to an employee who wore "inappropriate clothing."

Marshall said Foy's superiors at ERB disciplined Foy, who lives in Albuquerque, by transferring him to an office in Santa Fe. After a few months of commuting, Foy resigned.

Foy said at the news conference he wasn't suing the state but suing on behalf of the state. He's suing for the original $90 million invested, lost income he says is owed to the state, a civil penalty of at least $5,000 and legal fees. Marshall said each defendant in the case could be liable for as much as $300 million.

"The defendants sold the state of New Mexico a worthless combination of liar's loans, lethal leverage and toxic waste," the complaint says, using industry terms for different types of bad investments.

Malott called the lawsuit "baseless." "I simply lost faith in Mr. Foy's appropriateness for the position," he said. "It is unfortunate that he now seeks to exploit recent headlines for his personal vendetta against me."

State Investment Council spokesman Charles Wollman said Bland has done nothing wrong. "The state investment officer has not participated in any wrongdoing and will vigorously fight the reckless allegations made today," Wollman said Wednesday. "Mr. Foy's assertions are without merit, and his motivations are suspect at best."

Richardson appointed Bland to SIC at the outset of his first term. Bland makes more than $300,000 a year in the position.

Malott, a CPA, served as chairman of a Richardson task force to look at shortfalls in the state's education retirement fund and was named by Richardson to the task force to find an interim state treasurer in 2005, when Treasurer Robert Vigil resigned amid a kickback scandal. The governor also appointed him to the Retiree Health Care Authority.

Vanderbilt is a subsidiary of Pioneer Investments of Boston, which is owned by Unicredito Italiana, a large European Bank.

A representative of Pioneer didn't return a call Wednesday seeking comment. A representative of Unicredito didn't respond to an e-mail seeking comment.

Contact Steve Terrell at 986-3037 or sterrell@sfnewmexican.com. Read his political blog at roundhouseroundup.com. Contact Kate Nash at 986-3036 or knash@sfnewmexican.com. Read her blog at www.greenchilechatter.com.

DEFINITIONS OF KEY TERMS IN THE LAWSUIT

Liar's loan: A mortgage that requires little or no documentation of income
Toxic waste: A slang term for securities that are unattractive because of underlying provisions or risks. They generally are illiquid with poor pricing schemes.
Collateralized debt obligations: A security of investment grade backed by a pool of bonds, loans and other assets

Sources: Urbandictionary.com, answers.com, investopedia.com


A LOOK AT THE COUNCIL, RETIREMENT BOARD

State Investment Council
The council, which allegedly lost $50 million to fraud, has nine members, including Gov. Bill Richardson, Secretary of State James Lewis, State Investment Officer Gary Bland, State Land Commissioner Pat Lyons and Finance and Administration Secretary Katherine Miller. It handles assets from the Land Grant Permanent Fund, the Severance Tax Permanent Fund, the Tobacco Settlement Permanent Fund, the Water Permanent Fund and other public funds.

In the past 20 years or so, the funds have distributed more than $8.5 billion and accounted for some 15 percent of the state's annual operating budget.

Education Retirement Board
The board, which allegedly lost $40 million to fraud, has seven trustees, including Lewis, Bland and Education Secretary Veronica Garcia. It manages an $8.5 billion pension portfolio and has about 63,000 active members and 30,000 retirees.

The board recently told members it is being "vigilant" to keep the pension fund solvent. That plan includes asking the Legislature in this year's session to increase from 25 to 30 years the amount of time new enrollees must work to get full benefits.


Contributions at a glance
Contributions to Gov. Bill Richardson's presidential campaign by Vanderbilt employees and spouses:

Patrick Livney, Winnetka, Ill., Vanderbilt Capital Advisors, $2,300, Feb. 15, 2007
Stephanie Livney, Winnetka, Ill., $2,300, Feb. 15, 2007
Kurt Florian Jr., Wheaton, Ill., Vanderbilt Capital Advisors, $2,300, Feb. 15, 2007
Linda Florian, Wheaton, Ill., $2,300, Feb. 15, 2007
Edward O'Hara, Hinsdale, Ill. Vanderbilt Capital Advisors, $2,300, June 20, 2007
Jonathan Charak, Lincolnshire, Ill. Vanderbilt Capital Advisors, $1,000, June 20, 2007
Eric Maisel, Chicago, Vanderbilt Capital Advisors, $500, June 20, 2007
Kurt Florian Jr., Wheaton, Ill., Vanderbilt Capital Advisors, $1,000, Sept. 28, 2007
Linda Florian, Wheaton, Ill., $1,000, Sept. 28, 2007
Eric Maisel, Chicago, Vanderbilt Capital Advisors, $100, Dec. 8, 2007

Total: $15,100
($2,000 was refunded to the Florians in 2008 after campaign ended.)