Treasurer’s inquiry follows money trail

3 week investigation by Jeff Proctor & Matt Grubs

ALBUQUERQUE (KRQE) - Property tax bills started showing up last week in Bernalillo County homeowners’ mailboxes – a twice-yearly event that marks one of life’s two proverbial certainties.

Meanwhile, law enforcement agents from the state Securities Division are investigating the men trusted with collecting, distributing and investing those tax dollars: County Treasurer Manny Ortiz and his top lieutenant, Investment Officer Patrick Padilla.

Using public records, interviews with several people inside Bernalillo County and other sources, a three-week KRQE investigation has uncovered troubling details about a broker who has a longstanding business relationship with Padilla and Padilla’s wife.

Through the years, Padilla has funneled hundreds of millions of dollars in investments to the broker, Royce O. Simpson of Houston, Tex., for dozens of trades. Padilla’s wife, Cheryl A. Tucker, also sent a lot of business Simpson’s way, albeit on a smaller scale, when she was investment officer for Sandoval County in the 1990s.

Simpson has a dicey past in the brokerage business: He has been sued at least twice, including by Sandoval County, over allegations he overcharged governments for trades. Former employers have settled nearly $2 million worth of claims on his behalf.

KRQE has found that despite Simpson’s troubles – which Padilla denies knowing about, even though his wife was deeply involved in one of the cases – Padilla has not only continued to invest tax dollars with Simpson, he has followed the broker from firm to firm.

The Securities Division agents appear to be investigating, among other things, whether any criminal activity may have taken place in the Treasurer’s Office.

The agents are focused on the sales and purchases of Treasury bonds, most of which are worth millions of dollars and take seven or more years to mature, that comprise the lion’s share of Bernalillo County’s $300 million investment portfolio, KRQE has learned. On the county’s end, each one of those financial transactions for the past nine years has been executed by Padilla, who served two terms as treasurer before being appointed to his current position by Ortiz in January.

Another area of interest for investigators, KRQE has learned, are the relationships between the Treasurer’s Office and some of the brokers Padilla uses to invest the county’s money. Agents also are seeking to discover how much money certain brokers have made on trades with the county. So far, it has been impossible to determine how much taxpayer money has gone to brokers who do business with the county, because the Treasurer’s Office isn’t providing that information.

The agents have interviewed Padilla, Ortiz, top county administrators, commissioners and others within the county. They also have received some, but not all of the records they’ve requested.

Last week, subpoenas for financial transaction records were sent to nine brokers, including Simpson, KRQE has learned. The timeframe for the transactions is unclear.

Also last week, a Bernalillo County employee made a whistleblower complaint related to the goings-on in the Treasurer’s Office, KRQE has learned. That complaint went to the Local Government Division of the New Mexico Department of Finance and Administration, whose director is a member of the treasurer’s investment committee. The complaint has since been forwarded to the state Auditor’s Office.

Securities agents began looking at the Treasurer’s Office after scrutiny and criticism of Padilla’s and Ortiz’s practices leveled by county commissioners and administrators spilled into public view last month. Top county officials have said Padilla’s strategy of keeping most of the county’s cash tied up in long-term investments – and turning those investments over rapidly – has cost hundreds of thousands of dollars in actual losses and millions more in “paper losses” that have caused County Manager Tom Zdunek to delay capital projects and cut the county’s operating budget by 2 percent.

In a symbolic move, commissioners on Monday unanimously voted no-confidence in Ortiz.

The scrutiny and the investigation come at an inopportune time for Padilla, a Democrat, who is running for state treasurer.

In an interview last week, Padilla defended his investment strategy, saying it has earned the county upwards of $90 million during the past nine years, including $4.1 million this year.

He also denied any wrongdoing and said he doesn’t expect anything to come of the Securities Division investigation.

The agents “told me everything’s fine. They said you’re doing what normal people do in the investment bond markets,” Padilla said. “So, I mean, unless they were lying to me during that interview, I think you’ll find that there’s not gonna be anything that comes out of that investigation that’s negative.”

Last week and the week before, Ortiz, also a Democrat, promised KRQE an interview. But this week, he dodged attempts to ask him questions.

Reached by telephone last week, Simpson, who works for Oppenheimer and Co. Inc., declined to comment on his business with Bernalillo County. He referred questions to Oppenheimer’s corporate communications office, which did not return voicemail messages.

A broker with a past

Simpson passed his Series 7 exam and became a broker in 1986, according to a “BrokerCheck” report compiled by the Financial Industry Regulatory Authority, or FINRA. He first ran into trouble eight years later.

In 1994, while Simpson was working for Paine Webber, Inc., he and the firm were sued by a city in Contra Costa County, Calif. The city alleged fraud, negligence and other claims related to Simpson’s sale to the city of Treasury bonds and other investment instruments. The city sought damages of $2 million, the FINRA report says. Instead, Paine Webber settled the case for $1.17 million; Simpson shelled out $50,000 of that total from his own pocket.

The next time he was on the justice system’s radar was in 2000. And on that occasion, his problems were here in New Mexico. In October of that year, Sandoval County sued Simpson and his then-employer, Everen Securities, after serious losses in the county’s investment portfolio came to light. The lawsuit alleged, among other things, that Simpson was excessively trading investments that weren’t suitable for the county. Sandoval County figured Simpson and Everen had overcharged it by about $400,000 in commissions.

The trading account was opened in 1997 by then-Sandoval County investment officer Cheryl Tucker – Patrick Padilla’s wife. “Simpson is someone I do business with,” Tucker told the Albuquerque Journal in early 2000. “I have for quite some time.”

In 2002, a federal judge dismissed the lawsuit mid-trial. The judge ruled that Sandoval County hadn’t met statute of limitations requirements to bring a case against Simpson and Everen, and that Simpson hadn’t misled the county – primarily because Tucker was fully aware of the high volume of trades and the risk associated with the types of financial instruments Simpson was buying and selling for the county.

By the time the Sandoval County case was dismissed, Simpson was working for UBS Financial Services Inc., according to the FINRA report. He was working at that firm when he ran into his next bit of trouble, according to the FINRA document and published reports.

In September 2011, UBS repaid $659,000 to Harris County, Tex., for money that the city alleged was overpaid to Simpson through the course of numerous multi-million-dollar trades between 2007 and 2010. Simpson also accompanied Harris County’s then-financial services director on at least one trip to Costa Rica.

Two months later, in November 2011, Simpson left UBS and went to work at Oppenheimer, the FINRA document shows. A UBS spokesman said Simpson left that firm “with a clean record,” “in good standing” and with “no issues.” The spokesman said he didn’t know how common settlements such as the one the firm paid out on Simpson’s behalf are.

When asked why he would continue to invest with a broker who has run into as much trouble as Simpson, Padilla said he wasn’t aware of the trouble. “You’re the first one that’s ever told me that,” Padilla said. “I didn’t know he had a problem.”

It is unclear how vigorous a vetting process Padilla uses for his brokers. FINRA has some suggestions: “FINRA strongly encourages investors to use BrokerCheck to check the background of securities brokers and brokerage firms before deciding to conduct, or continue to conduct, business with them.”

KRQE pointed out that one of the issues that came up for Simpson, the Sandoval County case in 2000, involved Tucker – Padilla’s wife. “Twenty-three years ago? You’ll have to ask her – I wasn’t married to her then,” Padilla said.

In fact, the case was not brought 23 years ago. It was brought 13 years ago, in 2000. That’s the year after Padilla and Tucker were married. The couple’s marriage license is dated Aug. 10, 1999, according to Sandoval County court records.

Tucker, who at the time of the Sandoval County case was also known as Cheryl Tucker de Padilla, was present for her husband’s interview with KRQE in the Treasurer’s Office conference room. She did not introduce herself or speak during the interview, but she did use a hand-held video camera to record portions of it.

The emerging picture in Bernalillo County has striking similarities to what happened in the late 1990s and early 2000s in Sandoval County. In both cases, there were early warnings. In both cases, turns for the worse in the financial market exposed holes in officials’ investment strategies. In both cases, the counties took losses that impacted capital projects and operations. In both cases, a member of Patrick Padilla’s family was involved. And in both cases, Royce Simpson was involved.

Padilla acknowledged knowing Simpson, saying: “He’s one of my brokers.” He declined to elaborate.

Hundreds of millions in BernCo business

It appears Simpson began doing business with Bernalillo County while working at UBS. It is unclear exactly how far back the business relationship goes – in part because the Treasurer’s Office has not provided historical investment information requested by KRQE through the New Mexico Inspection of Public Records Act.

But based on a KRQE review of records that date back to 2011, which are posted on the county’s website, it is clear Padilla has been following Simpson. That review showed:

As of June 30, nearly $75 million of the Treasury bonds in the county’s investment portfolio had been purchased through Oppenheimer. That’s nearly 30 percent of what was in the portfolio on that day. Simpson is the only Oppenheimer broker approved to do business with the county. Bank of Albuquerque had the next largest share of the county’s business at that time, with about $60 million, or 23 percent, followed by Shearson Financial Services with 15 percent ($40 million.)

UBS, by contrast, currently has none of the county’s business. Padilla insists that the county still does business with UBS. But firm isn’t even on a list of approved list of brokers provided to KRQE last week by the Treasurer’s Office after a public records request.

That wasn’t the case while Simpson was working at UBS. For example: as of March 31, 2011, UBS had $70 million worth of business in the county’s portfolio; Oppenheimer had none. UBS had purchased $45 million worth of the Treasury bonds that were in the portfolio on Sept. 30, 2011. Oppenheimer? None. And as of Dec. 31, 2011, Bernalillo County still had no business with Oppenheimer, but purchases through UBS totaled $40 million as of that date.

By the time the Treasurer’s Office made its first presentation of 2012 to the county Board of Finance – which is composed of all five county commissioners – the picture had changed. Simpson had moved to Oppenheimer, and so had the county’s business. As of the end of March 2012, trades through Oppenheimer in the portfolio totaled $38 million. UBS trades accounted for only $10 million. And by June 30, 2012, UBS was completely out of the picture; Oppenheimer, through Simpson, had $62 million worth of purchases as of that date. On Sept. 30, 2012, the county’s investment portfolio included $57 million worth of Treasury bonds purchased through Oppenheimer. UBS? None.

Padilla said the documents reviewed by KRQE, which were prepared by his office for the Board of Finance, are merely snapshots of the county’s investment portfolio on a given day. He said they don’t accurately portray the diversity of brokers he uses to conduct trades.

A more recent snapshot, provided by the Treasurer’s Office after a public records request, shows that Simpson conducted 24 financial transactions for Padilla between July 1 2012 and Oct. 23 of this year. They totaled more than $110 million.

KRQE asked Padilla how much Simpson made in commissions for those transactions and, for that matter, how much any broker would make for trading with the county.

Padilla said there are no commissions or fees paid to brokers.

“They’re doing it for free?” KRQE asked.

“Did I say they were doing it for free?” Padilla responded. “You did. I said they don’t charge a fee.”

Besides, Padilla said he calls three, four – up to six – brokers before making a trade so he can get the best price for taxpayers.

“What you guys need to do instead of make accusations is you need to come down here, you need to look at the bid sheets,” Padilla said. “You need to look at the date that they were bought and purchased and see if it’s market value. If it’s not, then I’ve done something wrong, but it is.”

KRQE has requested the bid sheets. And during the interview, a reporter tried to take him up on his offer, asking Padilla whether the bid sheets were available for review right then.

“I have no idea,” Padilla said. “I’m not the county treasurer.”

A lack of cooperation and transparency

Padilla’s investment strategy has essentially been heavy on long-term Treasury bonds such as federal farm credits, Fannie Mae and Freddie Mac and similar federally-backed financial instruments that don’t mature for seven, 10, 15 or even 20 years. He has turned those investments over quickly, a practice many in the investment world characterize as “risky” and “unusual” for a county government.

But while interest rates remained flat – and they did for many years – the scheme enabled Padilla to keep the county’s checkbook fat. By his own accounting, Padilla’s investments have returned more than $90 million to county taxpayers since 2005.

So no one within the county asked many questions or paid much attention to what the Treasurer’s Office was up to.

“It was kind of like: ‘Yay, treasurer,’” County Commissioner Wayne Johnson told KRQE in an interview last month. Johnson acknowledged that the Commission and county management could have and should have been paying closer attention.

As the first hints of an uptick in interest rates began to resonate around Wall Street a year and a half ago, county staffers began to wonder aloud whether Padilla’s run-and-gun style, which is akin to “day-trading,” may eventually backfire, Zdunek, the county manager, told KRQE.

In the fall, the county ordered a “stress test” of its investment portfolio. The test, performed by RBC, Inc., showed that taxpayer money was at “significant interest rate risk.” That information was passed along to the Treasurer’s Office, but Padilla pushed ahead, investing mostly in long-term securities and continuing to buy and sell at high volume – often with Simpson making the trades.

According to Zdunek, Ortiz told him in February that the Treasurer’s Office would begin to move the county’s money into shorter-term investments.

But between April and June, documents reviewed by KRQE show, Padilla made 18 purchases at a total cost of almost $90 million. Thirteen of those purchases were for financial instruments that will take 10 years or more to mature. Simpson made four of those purchases for Padilla for a total cost of $19 million.

“I just can’t explain why he made those purchases,” Zdunek said.

In June, the interest rates went up and the purchases stopped. But the county’s investment portfolio had taken a hit. Padilla had to sell some bonds prior to maturity at a loss of about $750,000. And the county has suffered “paper losses” that range between about $14 million and $20 million, depending on how the market is behaving on a given day.

That’s when the scrutiny started.

At an August meeting of the county Board of Finance, a report from Slocum and Associates, a county-hired firm, showed just how outside the norm Padilla’s strategy is for a county government. The Slocum report also brought to the public’s attention for the first time the rapid turnover in the county’s portfolio.

And at the board’s Oct. 22 meeting, Commission Chairwoman Maggie Hart Stebbins asked Zdunek the question that had begun to percolate in the minds of many: Do the brokers who are making trades for the county make a profit on each trade? Zdunek’s answer: “Nothing’s done for free.”

Stebbins asked Zdunek to compile a list of how much money taxpayer money each broker has been paid.

To date, county staff has been unable to get that information from the Treasurer’s Office. Zdunek said he is troubled by Padilla’s and Ortiz’s willingness to provide basic information about taxpayer money.

County higher-ups aren’t the only ones who have had trouble getting cooperation from the Treasurer’s Office.

And state Securities Division agents aren’t the only ones reporting back to Santa Fe on the happenings in the Treasurer’s Office.

Wayne Sowell is the director of the Local Government Division of the New Mexico Department of Finance and Administration. By virtue of his position, he sits on the Bernalillo County Treasurer’s Investment Committee, which, among other things, approves brokers to do business with the county and helps to craft the county’s investment policy.

Sowell is a newcomer to DFA. His first investment committee meeting was on Oct. 24. It was a contentious affair, with Padilla and Ortiz resisting Sowell’s pleas for the committee to reconsider revisions to the county investment policy it had passed in July. The Board of Finance also must agree to any changes to the policy, and it had passed a different set of them at a meeting two days prior.

During one exchange, Padilla wrote down a response to one of Sowell’s questions on a legal pad and slid it to Ortiz.

The committee met again last week. On that occasion, Sowell came with a letter that pointed out what DFA sees as “critical shortcomings with investment policy revisions being proposed.” The letter pointed to a “lack of transparency and accountability, in that:” bids for financial transactions are not sought through an electronic trading platform; “there is inadequate disclosure and oversight of broker-dealers, which should have to be approved by the County Board of Finance as well as the County Treasurer;” and the Treasurer’s Office does not produce detailed reports on its financial transactions, including fees and commissions paid.

At that meeting, Ortiz and Padilla agreed not to make any investments that take longer than six months to mature through June.

Deep ties

By all appearances, the Treasurer’s Office, located in the basement at 1 Civic Plaza, has for years been governed by a complex web of deep familial ties and longstanding relationships. Padilla’s fingerprints have been on the operations of the office for decades.

On Jan. 1, Ortiz moved into the big chair in the Treasurer’s Office after defeating Republican George Torres by 10 percentage points on Election Night two months prior. Ortiz didn’t have to move his things very far.

That’s because his office had been right next door for the seven years prior, when he served as the chief investment officer under Padilla. After being term-limited out of office following two terms as county treasurer, Padilla’s push of the dolly wasn’t a long one, either; he simply took the office Ortiz had been in when Ortiz appointed him to be his chief investment officer.

Padilla’s relationship with Bernalillo County dates back more than three decades. He was a county commissioner from 1981 to 1984. And he served his first term as county treasurer from 1988 to 1992. Months after leaving office, Padilla and another county worker were accused in indictments of falsifying investment records, misusing public money and other crimes. A jury acquitted them of all charges in 1994. During his second term as treasurer, in 2006, Padilla was arrested on suspicion of DWI on Interstate 40 near the Big I. That charge was dismissed in an agreement with prosecutors under which Padilla pleaded guilty to careless driving.

Padilla was helpful in getting his former subordinate elected to become his boss. He contributed $851 to Ortiz’s campaign. An even bigger help was Tucker, Padilla’s wife, who at various times also has been known as Cheryl Tucker de Padilla. Tucker was the treasurer for Ortiz’s campaign; she also was his biggest financial contributor, chipping in more than $2,500 to the cause.

Padilla describes his duties in the Treasurer’s Office as “very part time.” His salary-and-benefits package pays him more than $70,000 a year. Additionally, he and Tucker run an accounting business, Padilla and Co., Inc., located at 2903 San Mateo NE. That location also is home to C.A.T., Inc., a for-profit corporation that lists Tucker as its registered director.

The ties don’t stop with family members. For example:  Dale Ruth, an Albuquerque flooring salesman, is the Padilla/Ortiz-appointed citizen member of the treasurer’s investment committee. Ruth was treasurer for two of Padilla’s campaigns – in 2004 and in 2008 – and contributed $100 to Ortiz’s campaign last year. Ruth also is a registered director, along with Padilla and Tucker, for C&D Scholarships, Inc., a nonprofit run out of the San Mateo Boulevard location that provides educational assistance to one disadvantaged high school graduate each year.

Some in county government told KRQE they believe Padilla controls the Treasurer’s Office through Ortiz, his former subordinate.

“If you wanted that change in administration, that didn’t happen,” Johnson, the county commissioner, told KRQE last month.

Padilla flatly denies being a puppet master. “I’m not the county treasurer,” he told KRQE several times. Later, Padilla conceded that he has been the one to make every financial transaction for the office during the past nine years – both during his tenure as treasurer and during Ortiz’s.

Padilla said he believes the criticism and scrutiny of his practices is politically motivated. He cited “opponents” and reminded a reporter: “I’m running for state treasurer.”

KRQE interviewed Padilla on Halloween. He was dressed in a purple shirt and tie. Others in the office were dressed as ghouls, witches and the like. Ortiz refused to be interviewed that day, pointing to a request from his staff that he don a costume. Staffers said the treasurer dressed as a werewolf. As for Padilla: “This is my costume,” he said. “I’m dressed as the county treasurer.”

 

 

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