A federal appeals court last week rejected an appeal filed by William A. DiBella, former majority leader of the Connecticut Senate, and his consulting firm, North Cove Ventures LLC, to overturn a 2007 jury verdict and judgement against them for their involvement in a fraudulent pay-to-play scheme in connection with the state’s pension fund.
In the decision, which the SEC announced Monday, a three-judge panel of the U. S. Court of Appeals for the Second Circuit in New York City found there was substantial evidence to support the jury verdict and that a federal district court in Connecticut did not improperly require DiBella to disgorge $374,500 in ill-gotten gains and pay $307,127 in prejudgment interest and $110,000 in penalties.
Specifically, the circuit court affirmed that DiBella and North Cove were guilty of aiding and abetting violations of the federal securities laws by Paul Silvester, the former state treasurer, as well violations of the Investment Advisers Act of 1940 by the private-equity firm Thayer Capital Partners and its founder and chairman, Frederic Malek.
The circuit court agreed with none of the legal defenses mounted by DiBella and North Cove, including that Silvester, though serving as treasurer at the time, never had a fiduciary duty to disclose the fraudulent scheme.
“It would be a strange result indeed to conclude that a publicly elected official who controls billions of dollars of public moneys set aside for the benefit of thousands of public employees in Connecticut is not a fiduciary of those funds and has no fiduciary duties as to those funds,” the panel said it in the ruling, which was signed by Circuit Judge Richard Wesley. “One would think the level of public cynicism about those who hold public office has not yet sunk to that level.”
The decision comes as the SEC is reconsidering strong pay-to-play restrictions for investment advisers. It may mark the end of one of the remaining legal challenges to the decade-long, high-profile federal enforcement actions stemming from Silvester’s admission in 1999 that he accepted kickbacks and directed them to colleagues in exchange for steering millions of dollars in state pension investments to certain financial firms. He pled guilty to criminal racketeering and conspiracy charges and was sentenced in 2003 to 51 months in prison.
An attorney for DiBella could not be reached for comment. He and his firm could appeal the court’s decision to the Supreme Court.
Under the scheme, the SEC charged that in November 1998 Silvester had asked Thayer to hire DiBella. Thayer, through Malek, agreed to retain him and pay him a percentage of the state pension fund’s total investment with Thayer, even though DiBella had no prior involvement with the transaction. Silvester also increased the amount of the investment with Thayer by at least $25 million solely to secure a larger fee for DiBella.
Silvester justified the fee because DiBella had helped him with his re-election as treasurer, while solidifying a future business and political relationship with Thayer, according to the SEC. The fee also was meant to compensate DiBella for helping to arrange a $100 million investment by the Connecticut fund with PaineWebber, now UBS Securities LLC. Officials at PaineWebber had refused Silvester’s attempts to pay DiBella fees, citing internal policies.
DiBella’s fee was originally a much larger $525,000, but it was reduced to the $374,000 figure after Silvester was voted out of office in January 1999 and was succeeded as treasurer by Denise Nappier, who decreased the fund’s commitment to Thayer, according to the SEC.
