By Sophia Bollag, SACRAMENTO BEE 

March 1, 2022

https://www.sacbee.com/article258526768.html

Fabian Núñez and Rusty Areias had a job to do.

The former lawmakers who left public service for private consulting were hired by a workers compensation company to convince the Department of Insurance to allow an acquisition deal to proceed. If they succeeded, they say they were promised a $2 million bounty fee.

Nothing in California law required public disclosure of the incentive. It came to light only because Núñez’ firm and Areias sued the company, arguing it failed to pay them.

Their work didn’t technically qualify as lobbying, allowing them to charge a bounty for it, a practice that is outlawed for other types of influence peddling.

Ethics experts interviewed for this article say the story is troubling, in part because of the amount of money, but also because nobody knows how common the practice is.

Ann Ravel, a government ethics expert, said she never encountered so-called success fees while she chaired the California Fair Political Practices Commission, the state’s political money watchdog agency.

“It seems unseemly that so much money is being utilized to influence public issues without having any transparency,” she said. “This is so extraordinary, the amount of money. That’s the part that is disconcerting – that it isn’t public.”

Bob Stern, who co-wrote the California lobbying laws approved by voters in 1974, said he doesn’t know how often consultants in Sacramento charge success fees to influence decisions like the one before the state Department of Insurance because there’s no required disclosure.

“I would have no idea,” Stern said. “I’m not sure if anyone would have an idea.”

‘IF THEY’RE SUCCESSFUL, YOU’RE SUCCESSFUL’

Rusty Areias says he agrees to work for success fees “now and then.”

“Clients typically like them because it’s tied to success,” he told The Sacramento Bee. “So if they’re successful, you’re successful.”

Bounty fees like the one Núñez and Areias say they are owed are common in many lines of work. A lawyer who gets such a fee for winning a case would call it a contingency fee. A lobbyist or consultant successfully facilitating a big contract might charge a commission. A political consultant who helps their client win an election may collect a “win bonus.”

Also common to such practices is the risk that the entity you’re working for might not pay up at the end. Democratic campaign consultant Roger Salazar said that’s part of the reason he doesn’t charge win bonuses when he works on campaigns.

“It’s not something that I’ve ever done,” Salazar said. “Because campaigns are fleeting, there’s no guarantee that a campaign will pay you.”

But unlike win bonuses, which must be disclosed in a campaign’s financial filings, there’s no required disclosure for success fees paid out to consultants seeking to influence government officials.

For the most part, they are part of private contracts, so there’s no public record, said Karen Getman, who previously chaired the Fair Political Practices Commission and now works at as a partner at Olson Remcho law firm.

“I don’t really know how common they are generally,” said Getman, who advises clients on success fee contracts. “Certainly we have had many clients over the years who employ success fees in non-lobbying contracts.”

Getman said most success fees she’s aware of are related to consultants helping clients secure a contract. Depending on the type, they can be charged as a percentage of whatever payout comes from a successful action, or a flat fee that can be “very, very large,” Getman said.

When consultants earn a success fee for helping secure a government contract, it could be valuable for the public to know about it, Stern said. “We’re talking about public money here,” Stern said. “It would give the public more information about how these contracts are being awarded.”

$2 MILLION AT STAKE

Unlike most success fees, the one Areias and Núñez say they are owed is described in detail in court documents.

In their lawsuit, Areias and Núñez’s former firm Mercury say workers compensation company Applied Underwriters and two men seeking to acquire parts of the company hired the former lawmakers in 2019 to help close out the acquisition deal.

Núñez and Areias were tasked with helping the company either secure approval from the California Department of Insurance for the deal or get the department to agree to let the company re-domicile its subsidiary, the California Insurance Company, in Illinois.

If they succeeded, they would get $1 million, according to a written contract submitted as evidence in court filings. If they did not, they would not be paid, and the CEO of Applied Underwriters would lose a $50 million deposit he had made contingent on the acquisition deal receiving regulatory approval, according to the lawsuit.

Applied Underwriters and the two men seeking to acquire parts of the company modified that agreement verbally, Areias and Mercury say, when Insurance Commissioner Ricardo Lara came under scrutiny for accepting campaign donations connected with the company, making it unlikely his department would approve the deal in time. In the suit, they allege that the company and the men they are suing directed them to focus instead on allowing the subsidiary to re-domicile in New Mexico and upped the success fee to $2 million.

Areias and Mercury say that they succeeded in convincing the Department of Insurance not to oppose the subsidiary re-domiciling in New Mexico and that they are therefore owed $2 million.

Their lawsuit is still pending. Applied Underwriters has argued in court filings that it does not owe Núñez and Areias money because they did not meet the terms laid out in the written contract.

ETHICAL QUESTIONS

Democratic political consultant Garry South said he’s always refused to include success fees in his contracts, including when he worked at Areias’ firm, California Strategies.

“I don’t like the smell of them, particularly when you’re doing work with a government entity,” South said. “I have always said no. I’d rather have a monthly fee.”

Like the other people interviewed for this story, South said he doesn’t know how often other consultants charge success fees.

“My guess is that it’s not common, but it’s not infrequent either,” he said.

Jerry Flanagan, litigation director for Consumer Watchdog, an organization that has been intensely critical of Lara, said it’s “shocking” that the work Núñez and Areias did is shielded from public disclosure.

“The sale of a workers’ compensation company like that at issue here can have a big impact on businesses and workers,” he wrote in an email to The Bee.

When reached by phone, Núñez declined to comment, instead deferring to Areias, who had already spoken with a Bee reporter. “I don’t have much to say on the matter,” said Núñez, who served as Assembly Speaker from 2004-2008.

AN INTENTIONAL LOOPHOLE

Lobbyists are generally forbidden from charging success fees for their work, but the payment Núñez and Areias negotiated was legal because the work they did doesn’t qualify as lobbying under California law.

Areias said he consults Getman, the Olson Remcho partner and former FPPC chair, on all the success fee contracts he enters into to ensure they are legal, including the one he had with Applied Underwriters.

As I understand it, if it’s general legislation that affects everybody, then in California law, success fees are not allowed,” Areias said. “We never have success fees for contracts on legislation… but in some cases they’re legal. And that’s why we have all our contracts reviewed by her.”

California law defines lobbying as paid work to influence legislation, “quasi-legislative” actions or regulation. Working to influence an agency such as the Department of Insurance on a matter involving a single company doesn’t fall under that definition.

When he helped write the law in 1974, Stern said he and his collaborators intentionally left out that kind of advocacy from lobbying disclosure requirements. They didn’t want to have every lawyer who communicated with the government or every consultant who worked on negotiating a government contract to be considered a lobbyist.

“We didn’t want to have 50,000 people registering as lobbyists,” Stern said.

Stern said a critical reason success fees are banned for lobbying is that they wouldn’t be paid – and therefore wouldn’t have to be disclosed – until after a desired action is taken. That’s problematic, because to effectively track lobbying, you need to know who is paying to lobby on government decisions before they’re made, he said.

A lot has changed since the law was drafted, including the creation of the Department of Insurance.

If Stern were rewriting the law today, would he craft it differently to include the type of influence peddling described in the lawsuit?

“Maybe,” he said.

Perhaps the law should be changed so more actions to influence decisions by elected officials are included, Stern suggested.

He noted that attempts to influence the treasurer’s decisions on bond investments and the attorney general’s decisions on what lawsuits to file aren’t subject to lobbying rules, but maybe should be. But Stern said it would be a mistake, for example, to require every lawyer who communicates with the attorney general to register as a lobbyist.

Stern suggested that for government contracts where a consultant was involved, giving some disclosure of how they were paid might provide the public with some beneficial information about the public contracting process.

Sean McMorris of California Common Cause, which advocates for transparency in government, said anytime an interest pays someone to influence a government official, it should be disclosed publicly.

“Full transparency is essential to a well-functioning democracy,” McMorris said. “When you have loopholes or carve-outs for situations like this where people can be paid behind closed doors, that’s an issue.”

John Pelissero, an ethics scholar at Santa Clara University, said the practice raises ethical concerns, including whether including whether it gives wealthy companies an advantage that regular people don’t have.

“It’s the appearance of how this takes place that raises questions around transparency and whether the public is being served,” he said. “Even if what took place is entirely legal or above board, it has the appearance that something is unfair in the way the system works.”

McMorris said that anytime someone is being paid to influence an elected official’s vote, it should be disclosed to both the official and the public.

“We ought to be able to know about that,” he said.

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SOPHIA BOLLAG 916-326-5545 Sophia Bollag covers California politics and government. Before joining The Bee, she reported in Sacramento for the Associated Press and the Los Angeles Times. She grew up in California and is a graduate of Northwestern University.