Judge: Fraud can't apply retroactively

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Lawsuit seeking to recover hundreds of millions of dollars in pay-to-play scheme thrown out

By Barry Massey

SANTA FE  — A judge has tossed out a whistleblower lawsuit seeking to recover hundreds of millions of dollars for the state because of alleged fraud and a “pay-to-play” scheme involving public investments.

In a decision issued Wednesday, District Judge Stephen Pfeffer invalidated portions of a law that allows citizens to bring lawsuits on behalf of the state to recover triple damages.

The judge said it’s unconstitutional to apply the law and its sanctions to activities that took place before the statute went into effect in July 2007.

At issue was a lawsuit brought by Frank Foy, a former investment officer for a state educational pension fund, who alleged a scheme in which political contributions to Democratic Gov. Bill Richardson influenced the awarding of investment business. Richardson was never named as a defendant.

The state attorney general’s office and an Albuquerque lawyer handling the case said Thursday that no decision had been made on whether to appeal the ruling or take other legal steps.

“We are analyzing the judge’s ruling and its implications on the law that could impact this and other cases in the near future. We do expect that the appellate courts will have to weigh in at some point,” said Phil Sisneros, a spokesman for Democratic Attorney General Gary King.

One provision of the law permitted civil lawsuits for actions that occurred as far back as 1987. Pfeffer invalidated that provision but left the rest of the law intact, which will permit damage cases for alleged fraud after mid-2007.

“Although the acts alleged by plaintiffs may very well be deserving of punishment, the Constitutions of the United States and the state of New Mexico preclude retroactive application of punitive statutory schemes that did not exist at the time of the alleged conduct, regardless of how loathsome that conduct might be,” Pfeffer wrote in a 30-page opinion.

The judge said, however, that his ruling did not prevent the attorney general from pursuing “criminal, civil or administrative sanctions based on laws that were in effect at the time of the alleged wrongful conduct if he deems it appropriate.”

Foy initially filed the lawsuit in 2008 against Chicago-based Vanderbilt Financial Trust and its related companies over $90 million in failed investments by the Educational Retirement Board and the State Investment Office.

The investments in complex mortgage securities called collateralized debt obligations were approved in 2006. Vanderbilt executives later contributed at least $15,100 to Richardson’s failed campaign for the 2008 Democratic presidential nomination.

Foy’s lawsuit was revised to add alleged fraud involving $153 million in other Vanderbilt investments by the state in 2004 and 2005.

Foy’s lawyer, Victor Marshall, disagreed with the judge’s ruling.

He contends the judge’s ruling doesn’t apply to some claims in the lawsuit. The lawsuit, for example, alleged that Vanderbilt has continued to make “false and misleading statements” about the investments — even after July 2007 — through periodic reports that overstated the value of the investments.

A New York lawyer for Vanderbilt and its executives, Peter Simmons, said the judge’s ruling “disposes of the claims at the heart of the plaintiff’s case” and his clients “stand firm in our position that the case has no merit.”

The governor’s office and a lawyer for David Contarino, the governor’s former chief of staff who was named as a defendant, did not immediately respond to requests for comment.

The lawsuit alleged that Contarino and other Richardson appointees helped steer state business to the Democratic governor’s political supporters. Contarino and other defendants have denied any wrongdoing.