Board wants explanation
Treasurer David Petersen frowns as he listens to members of the Board of Investment July 19 complain they were not aware of a large payment by the state to the Attorney General’s Office for assistance in a fraud settlement case.

Two members of a board that oversees the state’s investment portfolios told Treasurer David Petersen they have been in the dark about goings on at the Treasurer’s Office and want an explanation for a disputed $1.9 million payment to the Attorney General’s Office for legal work in a fraud settlement case.
At a monthly meeting July 19 of the Board of Investment, Bill Bell, director of the Department of Administration, told Mr. Petersen he learned of the payment and recent controversies in the Treasurer’s Office from Arizona Capitol Times articles.
“When I returned to town last week, I read the newspaper that this decision [to pay the AG’s office 35 percent of a multi-million settlement with a defunct health care loan company] had been made, and the money had been expended … and other comments that are troubling regarding this office, which have some reflection on this board,” Mr. Bell said. “I truly do not like that.”
The Treasurer’s Office years ago invested in National Century Financial Enterprises, which made loans to inner-city Medicare hospitals, until it collapsed in 2002 in a fraud scandal. Arizona was one of many states receiving settlements. Arizona cities and towns also invested in the company and have settled separately, and the case is still in litigation.
Chief Deputy Treasurer Blaine Vance refused to make the final of three payments to the AG’s office, contending most of the legal work in the case was done by Texas law firm that represents municipalities in the case, and the 35 percent should have gone to the state General Fund.
Andrea Esquer, spokeswoman for the AG’s Office said the payment was due for legal expenses and overhead.
“Under Blaine, they hadn’t been paid,” said Don Dybus, whom Mr. Petersen hired in June to oversee operations at the treasury. “We did wrestle that away and take control.”
Questioned by Mr. Bell and Felecia Rotellini, state superintendent of Financial Institutions, Mr. Dybus, said the state solicitor general advised him the payment “followed existing practice” and statute.
“The decision that was taken by this office to extend that amount of money was not discussed with this board, and I have an issue with that,” Mr. Bell said. “I was told that this issue is outside our [the board’s] area of responsibility. I want some clarification of that.
“I don’t want to sit on this board as an appointed official and have other people make decisions that truly ought to be made by this board,” he said.
The Treasurer’s Office and the board oversee $9.5 billion in investments and cash.
Ms. Rotellini echoed Mr. Bell’s concerns and also asked for an accounting of tobacco settlement funds that have been paid to the state.
Mr. Petersen’s only response to the criticism at the meeting was to question the accuracy of newspaper reports about his office.
Next meeting is Monday
The board scheduled a special meeting with the treasurer for July 24. Mr. Petersen is under investigation by the AG’s Office for alleged theft, fraud and conflict of interest. He says he will not resign before he leaves office at the end of the year.
Arizona Capitol Times reported July 14 that a trading room employee quit on the day the AG’s office seized computers and files in February after being warned not to falsify monthly reports to the board. What was called “window dressing” of a report that did not affect the state’s portfolios was discovered by a member of the Board of Investment.
Arizona Capitol Times reported in 2003 that Mr. Petersen knew of a previous securities violation committed by a treasury employee and this week confirmed the treasurer did not fire him until he was told by a state official that he could be politically damaged by the situation.
Patrick Hammons was fired July 21, 2003 for what Chief Deputy Vance said at the time were “personnel issues.”
Mr. Hammons had been the subject of a six-figure settlement in a lawsuit in California and had been fined $5,000 by the Securities and Exchange Commission and suspended for 45 days in 2000 for failing to disclose his involvement in a lawsuit against the National Association of Securities Dealers, which licenses investment professionals.
The lawsuit did not relate to Mr. Hammons’s duties as a stockbroker, but as a trustee of the Lenore Lum Trust. Several beneficiaries of the trust sued Mr. Hammons in 1994 for $500,000 for allegedly misusing funds. The lawsuit was settled in 1999 for about $285,000.
In an interview with Arizona Capitol Times this month, Mr. Dybus said Mr. Petersen has been the one in the dark because his deputies have not served him well. He said Vance and Deputy Treasurer Tony Malaj were “obstructionists, insubordinate,” and “I don’t think they understand what true ethics are. Had things been handled by staff in a forthright manner, David would not have been kept in the dark as much as he has been.”
Mr. Vance and Mr. Malaj have declined to comment.