The Tobacco Settlement Endowment Trust (TSET) Board of Investors (BOI) sued Oklahoma Attorney General Gentner Drummond last week for improper “interference” with the board’s authority to manage investments.
The petition was filed with the Oklahoma Supreme Court on April 15 and seeks a declaratory judgment confirming the independent authority of the TSET BOI to manage its investments without unwarranted interference. The five-member board includes the State Treasurer, who serves as chairman; the State Auditor and Inspector; and one designee each appointed by the Governor, the Speaker of the House of Representatives and the Senate President Pro Tempore.
The Supreme Court scheduled oral arguments in the case for 10: 30 a.m. May 14 in the Oklahoma Judicial Center in Oklahoma City.
Gov. Kevin Stitt, exercising his statutory and constitutional authority, selected the Tulsa law firm of Hall, Estill et. al. to represent the TSET BOI in the litigation.
The TSET board voted to authorize Hall Estill’s attorneys to take all necessary and appropriate legal action to protect the board’s statutory and constitutional authority to manage TSET investments.
Subsequently Hall Estill attorneys William W. O’Connor, John T. Richer, and Hillary N. Hurst filed a petition asking the Oklahoma Supreme Court to assume original jurisdiction in a lawsuit alleging the Attorney General’s Office obstructed board-approved investments with Neuberger Berman and Comvest Partners. Those investments were initially authorized by the TSET BOI last November.
The Attorney General’s alleged obstruction “has caused approximately $220 million in state funds to earn a significantly lower return” – a 13% return differential, according to State Treasurer Todd Russ – “which causes the State to lose money with each passing day,” the lawsuit claims.
“The people of Oklahoma voted to protect these funds from political interference,” Russ said. “The Attorney General’s attempt to override a legal investment process is a direct threat to the constitutional independence of the investment board.”
The Attorney General’s intervention relied on AG Opinion 2006-11, “which he has selectively invoked to insert his personal views into a process that was already approved and executed,” Russ said.
An Assistant Attorney General assigned to the board had previously approved all legal documents related to the investments – including contracts and side letters – before Drummond “reversed course without citing any legal deficiency,” Russ said. “This is a textbook conflict of interest.”
Interference by the A.G.’s office “has caused confusion among the Investment Managers as to who has the authority to enter into contracts on behalf of the TSET,” the Hall Estill team asserted. Additionally, Drummond’s actions have “caused Neuberger-Berman to seriously question its partnership with TSET,” and Drummond “has vowed to continue doing so.”
Furthermore, TSET contends its Board of Investors “does not need the Attorney General’s approval to enter into” investment agreements, and the A.G. “cannot obstruct a constitutional entity from carrying out its fiduciary duties.”
The Tobacco Settlement Endowment Trust (TSET) was created in 2000 via a constitutional amendment approved by Oklahoma voters.
Nothing in Oklahoma law “provides that the TSET BOI must seek and obtain the Attorney General’s approval before entering into an Investment Agreement,” the petition states. Nevertheless, the Attorney General … “has unilaterally attempted to control when and under what circumstances the TSET BOI may enter into contracts with Investment Managers.”
Besides asking the Supreme Court to assume original jurisdiction in the dispute, Hall Estill attorneys maintain Drummond “no longer represents the TSET” in this matter because Stitt appointed Hall Estill as special counsel.
AG ‘does not have unlimited power’ The Hall Estill team noted that the Supreme Court “recently confirmed ‘the Attorney General’s statutory authority to take and assume control of the State’s defense is subordinate to the Governor’s constitutionally granted Supreme Executive power…’” The Attorney General of Oklahoma “does not have unlimited power,” the TSET lawyers wrote.
In an April 17 response letter to Russ, Drummond indicated he has no beef with the TSET BOI and its outside counsel, but he remains contemptuous of the state treasurer for his “bizarre” and “unlawful” decisions, his impatience and poor judgment.
“To be clear, my office respects the Fund and its outside counsel,” Drummond wrote. “Neither the fund nor its counsel are the issue as they are innocent observers of your acts.”
“[I]t is necessary to further address your bad acts leading to this point,” Drummond told Russ. “[Y]our office initially requested approval of certain provisions in the Fund documents, which, as proposed, ceded the State of Oklahoma’s control of future litigation. Unfortunately, as my office was reviewing your request and negotiating more favorable, but not final, terms, you informed my office that you ‘recognize and agree to abide by’ contractual provisions submitting Oklahoma to the ‘exclusive jurisdiction of any federal or state court sitting in New York City.’ Additionally, and bizarrely, your March 24 correspondence states that you agree to waive Oklahoma’s right to a jury trial.”
Russ’ “insistence on sending” $100 million “ to out-of-state entities is one thing, but waiving the State’s rights and outsourcing Oklahoma to New York … is another. Indeed, it is unlawful.”
Drummond wrote that Russ’ “lack of patience and misjudgment” in unlawfully executing Fund documents “marks yet another time you have ended too far over your skis.”
Fortunately, Drummond continued, “my office was able to intervene and professionally engage with the Fund’s counsel. Through this professionalism … my office and the Fund reached an agreement on key terms to protect Oklahoma and meet the investment objective – precisely as intended and as my office instructed” the state treasurer.
Notwithstanding Russ’ “attempts to outsource Oklahoma’s sovereignty to New York,” Drummond said his office “successfully negotiated agreeable terms and conditions” that protected Oklahoma’s “rights and interests” and permitted the TSET BOI to invest in the Neuberger Berman Private Debt Eagle Fund LP. The appropriate documents were amended and were “agreed to by my office and legal counsel to the Fund and NB Alternatives Advisers LLC.”
Trust fund history Oklahoma and 45 other states sued ‘Big Tobacco’ in 1998 for the damage and death their products inflicted on Americans.
As the case was scheduled to go to trial, Big Tobacco and the participating states reached a compromise known as the “Master Settlement Agreement.” As part of this settlement, Big Tobacco is required to make annual payments to participating states, and those will continue so long as cigarettes are sold nationally.
Oklahoma is the only state that has a constitutionally protected trust fund for tobacco settlements.
This ensures that a portion of the state’s settlement payments from Big Tobacco are directed into an independent endowment trust fund. The TSET corpus balance today is $1.9 billion, Public Information Director Thomas Larson told Southwest Ledger last Friday. Interest earnings from that corpus are used for tobacco prevention, cancer research, and other health-related programs.