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Preventing Corruption

 

First Hand Look at a Scandal

By Douglas Minge Brown, MBA ’61

I HAD JUST LAUNCHED Douglas Minge BrownIndependent 529 Plan, a prepaid tuition program for 275 independent colleges and universities, and was ready to retire in October 2005. Sarah had sold her business, and we were planning an eight-month sabbatical in Manhattan, when an aide to New Mexico Gov. Bill Richardson called requesting I meet with the governor. The State Treasurer’s Office had just erupted in scandal. Four people would eventually be indicted for various crimes ranging from extortion to counterfeiting. The two previous state treasurers were both destined to spend time in a gated community run by the Feds. Would I please be willing to fix it? Partly out of a sense of duty, and partly for the intrigue of the challenge, I agreed. I’d done several corporate turnarounds, but nothing prepared me for this experience. 

An investigation by Deloitte & Touche begun weeks before had determined that the state’s checkbook was out of balance by $160 million, and unreconciled items stretched back over five years. The officer in charge of this department had no banking experience. His previous job was as a baggage handler for America West. Only one of my staff of 42 had any previous investment experience, and we were running a $5 billion portfolio. There were few controls, little disclosure, and no effective oversight. Investment guidelines, purchasing policies, and personnel policies were routinely ignored. All efforts had been directed to overpaying on commissions and purchases to generate the wherewithal for “campaign contributions.” The agency’s outside auditor was a small firm from downstate that had for years given the Treasurer’s Office clean opinions with no material weaknesses. That relationship was so cozy that other CPA firms had stopped bothering to bid. I came to appreciate Warren Buffet’s observation that there is seldom just one cockroach in the kitchen.

Now for the scary part. Document shredders had been working overtime. The alarm contacts on doors and windows had been super-glued together to enable after-hours entry. Video cameras had been redirected and videotapes erased. Staff members who were reluctant to go along with these schemes had their personnel evaluations downgraded retroactively. One had her car vandalized. Alerted to this pattern of criminality, I had a detective agency check the premises for telephone bugs. They found five, including one on my phone.

The most chilling moment came after I immediately had the alarm system repaired. The very next morning, an early-arriving employee went to her desk and realized she had forgotten to turn off the alarm. Her panic turned to puzzlement when there was no police response. The alarm was not working. Later that day, the alarm company revisited and informed us that someone had tampered with the system the night before by inserting a sophisticated lens to divert the electric beam.

From the Deloitte findings and my extensive interviews with staff, it became clear that all roads led to a cohort of nine staff members. Several of them were related to the former state treasurer. Fortunately, all but two were patronage appointments who could be summarily replaced.

At the staff meeting I assembled to announce the departures, I had expected some regrets—after all, there are always lunch groups, carpools, friendships. Instead, the news was greeted with a standing ovation. Clearly, I had gotten it right, and clearly the remaining staff was with the new program. There were two other surprises. An agency veteran said that this was the first staff meeting that the agency had held during her 10-year career there. The other surprise was that there was no extra burden of work despite a layoff of more than 20 percent of the workforce. That group had been doing nothing but making mischief.

Progress came swiftly, in large measure due to several key executives from other state agencies who were willing to join the team and in no small part due to a dedicated existing staff. I will forever be especially grateful for the contributions and leadership provided by Scott Stovall, Mark Valdes, Joelle Mevi, Mark Canavan, Janie Tabor, Jodi Porter, Laura Montoya, and Judy Espinosa. Help from other government agencies was indispensable, notably from David Abbey, Amy Chavez, Olivia Padilla-Jackson, Roy Soto, Stephanie Schardin, and Hilary Tompkins. Accounts were balanced; all transactions were posted on the website; oversight was created; electronic trading platforms eliminated commissions; four investment specialists were hired; 300 revisions were made to the investment policy; personnel, purchasing, and security policies were created. The payoff was earning an AAA rating from Standard & Poor’s for our principal fund, a first for the State of New Mexico. The fund’s yield climbed from 46th among the states to 7th. We got a clean audit that meant something. I am pleased that my elected successor, James Lewis, is committed to integrity and to building on the foundation that our team built.

As I exited in December 2006 in favor of my elected successor, I did so with several regrets:

  • Try as we did with counseling resources and morale-boosting events, there remained some residual trauma from the abuses of the previous administration.
  • Several of the employees I fired were quickly rehired by other state agencies. One had been fired by two state agencies before landing at mine, and another had been abruptly let go from two finance positions in a city. After I let this person go, she was rehired by the very city council that had previously fired her!
  • To date there has been little appetite for ethics reform at the New Mexico State Legislature. Proposals by Gov. Richardson’s Ethics Reform Task Force were largely ignored. Campaign contribution laws are weak and loosely enforced. There remain no limits on the size of contributions for state office, even on cash contributions. New Mexico is not the only state with these problems. During my short-lived tenure as treasurer, there were at least three other states under investigation for various scandals.

A few observations about corruption: I have come to regard it as a fairly natural state of affairs. While some people have a moral compass that will keep them doing the right things when no one is looking, many don’t. If there is a group of people in positions of power long enough to set up mechanisms to exercise that power, and if there is inadequate oversight and a lack of checks and balances, stir well and you will have corruption. This behavior transcends race, ethnicity, or nationality, and the vulnerability to it can be anticipated in corporations and nonprofits, as well as government.

Then there’s what I call the “Myth of the Lovable Rogue,” the public official who may be on the take, but the city or whatever runs like a top anyway. Don’t believe it. In my experience, a truly corrupt outfit diverts, distracts, and demoralizes. When the wrong things are being done, the right things don’t get done.

You now know more about the turnaround at New Mexico’s Department of Treasury than most New Mexicans. The local papers and other media that had for months reported daily on the scandal showed no interest in carrying the story of our turnaround. We thought it would be in the public interest, but apparently they were stuck on “if it bleeds, it leads.”

The press is addicted to alarmist stories. The flames of alarm are further fanned by parties who stand to gain from the issue of concern—businesses trying to profit, universities seeking research dollars, and politicians seeking problems to address. 

Y2K was a classic nonevent. So much time and capital resources were siphoned off to deal with this largely phantom problem that capital spending on productive projects sagged nationally for a year or two. This folly came home to me when all the employees in our building were required to replace their garage access cards with ones that were “Y2K compliant.” And all these cards did was to make the gate go up and down!

There is one area of media coverage that I believe should be reformed: weblogs sponsored by newspapers. If someone wants to spew trash by posting anonymous inflammatory or false entries on a self-sponsored blog, I support their right to do so. But if a newspaper will not publish an editorial letter or op-ed piece without attribution, why should it be able to sponsor a blog that does so? All during my time as treasurer, a blog sponsored by the Santa Fe New Mexican published untrue, vile, and salacious items about our staff members—entries most likely posted under pseudonyms or by friends of people from the group fired for misconduct. 

Douglas Brown, MBA ’61, is a director of several corporations and nonprofits and lives in Albuquerque, N.M. He is a former Stanford trustee and recipient of the University’s Gold Spike Award.