Thursday, March 21, 2013

A Note on Corruption in Texas

            The legislative session is well underway but the biggest political deal was actually cut before the opening gavel. Nothing was said explicitly—nothing agreed to openly—certainly nothing was written down but the agreement, such as it is, potentially affects state leadership including the governor, lieutenant governor and attorney general. It’s more about what won’t be done than what will, which at the Capitol is just as freight-filled and heavyweight as any legislative initiative.
            The issue involves the Austin district attorney’s office and the biannual effort by the state's Republican leadership to strip the Democratic prosecutor of authority to investigate corruption in state government. Republicans were making the usual noises late last year about reducing the D.A.’s authority—and then went silent. What happened in the meantime was the revelation of bad practices in the awarding of grants at the newly-created Cancer Prevention Research Institute of Texas, CPRIT—a scandal that guarantees at least two more years of life to the Austin prosecutor’s Public Integrity Unit and assures no inconvenient questions for state leadership. What’s not to like?
            A major investigation that targets powerful politicians sucks a lot of goodwill from the investigator, as prosecutors learned when they went after House Majority Leader Tom DeLay. The process leading to conviction of an elected official is as much political as criminal yet the D.A. must repeatedly reassure the public the motives for going to court are not partisan. With a prosecutor now in office who is known for professional caution, after a predecessor who shot from the hip, the chances of high-level indictments in the CPRIT case have never been great. But dynamics are shifting with an attorney general who wants to be governor—a lieutenant governor who just lost a disastrous run for Senate and suddenly seems vulnerable—and a governor who wants to be president. For all of these men any hint of scandal could be fatal, whether aired in a courtroom or in the press. If the district attorney merely allows speculation regarding her intentions to continue, declining to refute her interest in following the case wherever it leads, that will be enough to make her opponents reluctant to stir the pot or question her authority. All they want is a little consideration in return which they are almost certain to get. That’s how things work during the legislative session.
            Outside the Third World few places have a political dynamic that lends itself to corruption like Texas today: a mostly one-party state where money plays an outsized role and with a governor who has been in office a long long time and has a history of “initiatives” that somehow always seem to lead to more money in his campaign coffers. These ingredients are tempered by a system that supports transparency, at least more so than in many other states. None of which has led to legal action previously. Suppose it were different, however. Suppose prosecutors really wanted to get to the bottom of the grant review process at CPRIT and check any ties to high state officialdom—ties that are much rumored. They could do worse than issue a single subpoena to one man—the so-called “missing man” in the investigation although he seems easy enough to find—with ties to the state’s leadership and who is a founding father of the Texas culture of crony capitalism as evidenced, even before the cancer fund, by the much-abused Emerging Technology Fund.
            His name:
            Charles W. Tate.

            Healthcare is one of the top industries in Texas, as in the nation, and Charles Tate has his fingers in many pies.
            He is the Tate of Hicks, Tate and Muse, the legendary Dallas buyout firm. He is a member of CPRIT’s Oversight Committee which of course prompts the current interest. Chairman of the Texas Life Science Center of Innovation and Commercialization, as well. Chairman of the external advisory committee of the Department of Biomedical Engineering, “a single University of Texas academic department spanning U.T. Austin’s Cockrell School of Engineering, M.D. Anderson Cancer Center, and the Health Science Center at Houston,” according to his bio on the site of the Columbia University School of Business where he did his graduate work and serves on the Board of Overseers.
            In another biography he is quoted as saying, speaking of his younger days as a kid in Texas, “I had grown up with very modest financial means. I knew how that felt and didn’t ever want to feel it again. So I was very ambitious in terms of my aspirations relative to a business career.”
           Tate can certainly check that box off on his life’s list. He’s loaded. The guy is a walking corporation—the industries being Big Pharma and biotech, apparently with corporate ethics to match. An official of the Texas Ethics Commission where Tate files his personal disclosure form listing his assets said jokingly that Tate’s file is second only to Governor Rick Perry’s in number of pages. The similarity to Perry is striking. Both Charles Tate and the governor are conservatives who come from modest backgrounds who decry big government and yet manage to put away a few dollars by leveraging the State of Texas. They’ve done some of that work together scratching each other’s backs.
            Ignore Tate’s stock ownership for a moment. Look at his real property accumulation listed with the Ethics Commission instead. There’s the $6 million digs in River Oaks, a cabin and one-sixth interest in a condo in Colorado, two co-ops on New York’s Upper West Side, a lot in Germantown, N.Y., and another in Carmel, Ca.; two in Galveston, and one in the so-called “next Santa Fe,” Chama, New Mexico. Ignore his stocks and bonds on file with the Ethics Commission because although considerable what would be most revealing are actually the holdings of his investment company Capital Royalty headquartered in Houston whose interests are secret. Tate describes Capital Royalty as “a market pioneer and innovator in healthcare investing that focuses on intellectual property investment in FDA-approved biopharmaceutical assets through royalty bonds, structured debt, revenue interests and traditional royalty monetizations.” In other words it’s a private equity firm that works “directly with leading healthcare companies, research institutions, and investors to provide customized financing structures.” The missing partner, the unseen hand, is the State of Texas itself especially the University of Texas in its various incarnations.
            Capital Royalty’s “strategic investment committee” includes Dr. Mark McClellan, son of former Texas Comptroller Carole Strayhorn—McClellan was director of the U.S. Food and Drug Administration in the Bush Administration—and John Mendelsohn, former president of UT M.D. Anderson Cancer Center. There’s also a Boston biotech investor, Henri Termeer, who has had business relationships with the present M.D. Anderson president, Ronald DePinho.
             As the details of the grant-awarding process at CPRIT became public late last year the Houston Chronicle quoted internal CPRIT email showing that Tate had pushed for weakening controls on awards and had personally pushed for a grant to DePinho’s wife, herself a cancer researcher. A few years earlier Tate was exposed by the Dallas Morning News for having bought stock in Thrombo Vision, a biotech company that he voted to award a grant as a leader of Governor Perry’s Emerging Technology Fund.
            It’s worth revisiting what Rick Perry did with the ETF. It was quite clever, a new twist on an old game, selling influence: He gave grants, through men like Charles Tate, to companies whose directors and owners then gave the governor campaign contributions. No system of campaign finance is much different really. There’s always quid pro quo on some level, to be fair to the governor and Mr. Tate. The Austin district attorney for example relies on money and endorsements from the Austin Police Association whose officers present her with cases for prosecution and whose long history of shooting minorities the D.A. has coincidentally never found fault with. Men like Perry and Tate, in a way, are just more honest about the politics of the process. More direct (see you might say. It should be little surprise that CPRIT got in trouble. If you look at the first dozen or so companies that received funds for research, many of them are re-treads, some with political connections, from the Emerging Technology Fund. The present scrutiny is focused on a company called Peloton (whose major investor was a Dallas-based millionaire Republican donor) for which the CPRIT grant approval process was completely ignored. That’s where the D.A. entered the picture. Lucky for her it's a target rich environment.
            Tate is suspect because he was the third or fourth largest contributor to both Rick Perry and Lieutenant Governor David Dewhurst last year. Dewhurst actually appointed Tate to CPRIT. Charles Tate was also the single largest individual donor to the CPRIT Foundation which increasingly has the smell of a slush fund. The only surprise here is how quickly the rot at CPRIT set in. Most state-affiliated organizations take decades to reach the level of impropriety that CPRIT achieved in only a couple of years. A diagnostician would say corruption was imported, that CPRIT was "infected." To use the terminology of healthcare, Charles Tate is a good bet as the disease vector.

            And most interesting is the role of Attorney General Greg Abbott.
            A year before the CPRIT storm broke, Abbott ruled that Lieutenant Governor Dewhurst could withhold email between the lieutenant governor’s office and Tate. General Abbott’s office also withheld all substantive communications between Charles Tate and the state’s other favorite pot of public money that politicians like to take advantage of, the huge Teachers Retirement System. At the same time Gov. Perry’s office said that it had no documentation on Mr. Tate at all—except a bio provided in 2002 when the biotech businessman asked to be appointed by the governor to a board or commission.
            In that c.v., Charles Tate described himself as member of a group that tries to introduce Houston’s inner-city troubled youth to the joys of golf and, more importantly for Perry’s purposes, mentioned his role as “Chairman of the Technology Transfer Ad Hoc Committee for the University Cancer Foundation Board of Visitors’ Institutional Initiatives Committee.” Tate’s MD Anderson title is what this should really be all about. The district attorney may find her way through the grant application process but the real rip-off, the greatest potential loss to the taxpayers of the state, will be technology transfers in which research done at state universities paid for by public dollars is leeched away by institutional arrangements with for-profit companies. "The biopharma industry today," Tate wrote in a recent op-ed piece for the Houston Chronicle, "readily acknowledges its old business practices are outdated, and there is a search for improved commercialization models that bridge the cultural chasm between academic/medical research institutions and commercial biopharma companies." This is the academic version of the privatization wave that state government went through previously, with even more ethical pitfalls because of the difficulty in knowing the value of the state's intellectual property. That is not part of the D.A.’s brief in this case but it represents big losses for Texas government. On this front General Abbott’s record has been better. He recently ruled that public universities must release contracts executed with Big Pharma involving joint research. The drug companies, prompted by UT M.D. Anderson, sued Abbott and the case has yet to be resolved. The attorney general also ruled more than a year ago against the CPRIT general counsel’s wishes, forcing public release of applications for grants. Any communication between Charles W. Tate and high officials is still off-limits, according to General Abbott.
            Which leads us to the University of Texas Investment Management Company where Tate is also on the board. UTIMCO serves as a kind of stand-in or case study for how business may be conducted at CPRIT. General Abbott also declined to release the majority of Tate’s email to UTIMCO CEO Bruce Zimmerman but from the context of what was disclosed and the redactions done by UTIMCO it seems clear Tate was asking the university investment fund to provide data for his private company.
            In fact he’s done more than that. In an exchange of email in late 2011 Tate asked UTIMCO CEO Zimmerman to make calls to pension and investment groups across the country to promote Tate’s private business. Which Zimmerman agreed to do. “I would be happy to reach out to institutional investors to tell them about Capital Royalty,” Zimmerman wrote. “As you know, we very much like the investments, but, alas, are barred from participating due to our Code of Ethics.” Zimmerman’s "code of ethics" did allow him to provide a long list of whom he would be willing to contact for Tate: “Calpers, Calsters, CPP, Notre Dame, Michigan, Stanford, Harvard, U Penn, Emory, DUMAC, U of Calif, Chicago, Texas A&M Foundation, NYU, U of Wash, Brown, CommonFund.” What’s most disturbing about this back-scratching is that it came shortly after Zimmerman asked Tate to speak to reporters about the good work UTIMCO does and at about the same time that Tate helped defend Zimmerman and UTIMCO staff’s multi-million dollar bonuses (“Attached is the final Talking Points,” Zimmerman wrote to Tate, “to help support the phone calls you have graciously agreed to make on Monday regarding Tuesday’s incentive compensation decisions.”) Tate did not even try to be that subtle:
            “Congratulations to you and your staff for another great comparative performance relative to your peers for the 12 months ending June 30, 2011. Regarding Capital Royalty, I look forward to the list of institutional investors you have been working on. The attached is a list of state pension funds and endowments that are prohibited by law from dealing with private equity placement agents and, therefore, must be contacted directly by the manager [Zimmerman.] Please consider these as you compile your list.” In effect Tate asked a state employee to recruit investors for him. If that’s what he did at UTIMCO—in return for a little support on staff bonuses—imagine what he could have asked of the governor and lieutenant governor in return for hundreds of thousands of dollars in campaign contributions. Charles Tate is a quid pro quo kind of guy. That gets results but can be problematic when the grand jury meets.
            “It is common practice for us to have one-on-one conversations with Board members about prospective investments in which they may have some expertise/special interest,” Zimmerman wrote in another email. That’s how the state system of boards and commissions is supposed to work, not just UTIMCO but also CPRIT and many others in which men and women like Charles Tate offer private expertise on public investments or grant applications.
            Some commissions and governmental bodies are, frankly, particularly susceptible to corruption. One of the bigger self-dealing scandals in UTIMCO history involved another marquee name from Hicks, Tate and Muse—Tom Hicks—appointed by then-Governor Bush and who was caught doing private business on public turf. (Hick's younger brother, also an investor, is now a UT regent and a UTIMCO board member but there's no indication he's following in his big brother's shadier footsteps.) For Charles Tate the problem is he fits so well the part of the heavy in this motion picture. At board meetings he is often called upon by his peers as an expert, yet his demeanor in these meetings never portrays any hint of private interest. If there is a bad apple at UTIMCO let's propose a simple mechanism not unlike what happened at the Emerging Technology Fund that would make Charles Tate the perfect bagman. First he improves Capital Royalty's bottom line by hijacking UTIMCO's data or getting staff to promote him and his business. Then he turns around and gives big contributions to the governor's officeholder account (both of which he's already doing, by the way.) There's no connection to the governor because Tate was not appointed to UTIMCO by the governor. He was chosen by the regents themselves which establishes a cutout between Charles Tate and Rick Perry. Pretty neat, huh? The key to any possibly more direct entanglements means getting a look at Capital Royalty's portfolio.
             For the state's system of boards and commissions to work, it presupposes a level of integrity that Charles Tate does not appear to possess. At least three times now he has been caught mistaking his private interest for the public good. If he’s still in a position of public trust it is only because the powers-that-be want him there and not because of any public-spirited self sacrifice on his part.
            Which leads us back to the grant review process at the Cancer Prevention Research Institute of Texas.
            Who better to talk to than Charles W. Tate?

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