Cost of investigating mystery $1.8B already overbudget

Cost of investigating mystery $1.8B already overbudget

UPDATE: 1/15/25 - In a 65-page report released late this afternoon, AlixPartners, a New York-based global consulting firm, determined that about $1.6 billion of the mystery $1.8 billion "did not represent real cash." Instead, the approximately $1.6 billion was "incorrectly recorded" to a bank fund as part of a transition years ago to a different state accounting system, according to the report. The remaining approximately $200 million is included in the “cash balance reported by the STO (State Treasurer’s Office) and belongs to the General Fund,” the report said. The Nerve is planning a separate story on the report, which was released by the S.C. Department of Administration.

By RICK BRUNDRETT

The state attorney general's and comptroller general's offices collectively have paid more than $2.8 million to three outside law firms in connection with a federal investigation of the mystery $1.8 billion – $743,000 over what was initially budgeted, records obtained by The Nerve show.

In a related matter, the S.C. Department of Administration has paid more than $1.4 million to a consulting firm to conduct a separate “forensic accounting” probe into the disputed money and related matters, according to records.

A report by the consulting firm is expected to be released later today, a Department of Administration spokeswoman told The Nerve.

Whether the $1.8 billion actually exists is still unknown, more than a year after questions were first raised. Since last April when Gov. Henry McMaster created a special task force to investigate the matter – which met secretly, as The Nerve repeatedly pointed out – state officials have not released any findings of the separate investigations.

Contacted last week by The Nerve, David Ausiello, a spokesman with the U.S. Securities and Exchange Commission – which was identified in contracts with the outside law firms hired by the state – declined to discuss any specifics about SEC actions, repeating only the agency’s position that it doesn’t comment on the “existence or nonexistence of a possible investigation.”

Likewise, in a written response last week, Robert Kittle, spokesman for S.C. Attorney General Alan Wilson, declined to answer any questions about the SEC investigation, which was cited in a contract awarded last January to an outside law firm hired to defend the state, saying only the office “does not comment on pending matters.”

State Comptroller General Brian Gaines’ spokeswoman, Kim Corley McLeod, in a written response last week said questions “regarding any investigations of the state should be directed to the Office of the Attorney General.” Contracts with two law firms hired by the office cited the SEC investigation, as The Nerve revealed last year, though no details about the probe were provided in released documents.

Contacted Monday by The Nerve, the S.C. Treasurer’s Office, headed by Curtis Loftis, declined comment on any SEC-related questions.

On its website, the SEC says its mission is to “protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.”

The SEC is responsible for bringing civil and administrative actions for violations of federal securities laws, and partners with law enforcement agencies to “bring criminal cases when appropriate,” according to its website.

No one has accused any S.C. officials of any criminal wrongdoing.

As The Nerve previously has pointed out, the $1.8 billion equates to more than $300 for every man, woman and child in South Carolina; or, according to the South Carolina Policy Council – The Nerve’s parent organization – up to $1,440 per taxpayer, based on a formula similar to the one used for state taxpayer rebates in 2022.

The  Policy Council recommended rebating the full amount to taxpayers if no state agencies claimed the money by June 30 of last year, or if agencies couldn’t provide evidence by then of their share of the funds.

No state agency had claimed its share of the $1.8 billion, the Department of Administration repeatedly told The Nerve in written responses last year.

Meanwhile, the taxpayer cost of investigating the matter keeps growing. The Attorney General’s Office, for example, paid the Atlanta-based King & Spalding law firm a total of $2.46 million billed from February through October last year, according to records provided by the office this month to The Nerve under the S.C. Freedom of Information Act.

The total was $665,121, or about 37%, more than the $1.8 million that lawmakers appropriated for legal fees.

In his written response, Kittle said the charged fees “beyond the appropriation” were paid from the office’s “carry-forward general fund operating expenses.” Under the retention agreement with King & Spalding, the Attorney General’s Office “understands that the cost of handling matters is not predictable and that the Special Counsel has not made a commitment or promise as to the maximum fees and expenses necessary to complete the Matter.”

The Nerve in June revealed that King & Spalding lawyers with experience in handling Securities and Exchange Commission matters were hired by the office to represent the state in connection with the $1.8 billion. The firm on its website says it has more than 1,300 attorneys in 24 offices worldwide.

The retention agreement, which the office provided last year to The Nerve under the Freedom of Information Act, said the firm will “represent the State in connection with an SEC investigation, ” listing it as “In the Matter of State of South Carolina, A-04055,” though it didn’t give details of the probe.

Other legal bills

The Comptroller General’s Office paid the Columbia office of the Wyche law firm and the Atlanta-based Robbins Alloy Belinfante Littlefield firm a total of $164,325 in fees and costs billed from July through November last year, bringing overall payments to the two firms to $407,974 since August 2023, according to records provided last week by the office under the open-records law.

In the summer of 2023, Comptroller General Gaines hired the Wyche law firm, which has offices in Greenville and Columbia, to represent his agency on “Issues Regarding SEC Investigation,” though no details of the probe were included in the copy of the agreement provided last year to The Nerve, which appeared to have at least one paragraph deleted.

From August 2023 through May 2024, paid legal fees and costs totaled $170,233, according to records provided last year by Gaines’ office under the open-records law. The firm was paid a total of $43,506 for costs billed from July through September last year, the latest records show.

Under a separate May 2024 agreement, Gaines approved hiring the Robbins law firm to represent “certain employees” in his office in the SEC investigation. As with the Wyche contract, no details about the investigation were listed in the copy of the agreement provided to The Nerve, which appeared to have several paragraphs deleted.

Among other practice areas, the law firm, which bills itself as “One of Atlanta’s Leading Litigation and Regulatory Firms,”  represents “whistleblowers” in SEC cases, according to its website.

The firm was paid a total of $73,416 in legal fees and costs through June last year, according to records provided earlier by Gaines’ office. Payments totaled $120,819 for expenses from July through November, the latest records show.

Gaines’ office last year said the “current” maximum amount designated for legal fees and costs with the two firms was set at a total of $330,000. With the subsequent payments, the firms collectively have received $77,974, or nearly 24%, over the previous stated cap.

In her written response last week, McLeod didn’t answer The Nerve’s questions about the reasons for the overcharges or how specifically they are being funded in the agency’s current budget, saying only, “Our office uses existing resources to cover all costs of these engagements.”

Delayed report

Meanwhile, the S.C. Department of Administration is expected today to publicly release a report by AlixPartners, a New York-based global consulting firm, on the $1.8 billion and related matters. The previous deadline to submit the report under its contract was Dec. 16, which the department agreed to extend.

The Nerve last September revealed that the firm, which according to its website has 26 offices worldwide, was not the low bidder for the “potential” $3 million contract awarded in July, though under state law, state procurement officials don’t have to accept the lowest bid but instead can use other purchasing procedures depending on the situation.

In addition, lawmakers included a special provision in this fiscal year’s state budget which, among things, exempted the department in awarding the contract from using purchasing procedures under the law. The Legislature budgeted $3 million to the department for the contract; under the award with the firm’s Washington, D.C., office, the state agreed to an amended total estimated fee of $2,796,444.

Online comptroller general records show that through November, the Department of Administration had paid AlixPartners a total of $1.46 million in fees and costs. The Nerve has a pending open-records request with the department for a current breakdown of the expenses.

Last June, the department on its website called for proposals for “an independent forensic accounting firm” to “conduct a forensic accounting review of all cash and investments held in the State Treasury.”

Forensic accountants can work in criminal or civil investigations, using “accounting, auditing and investigative skills when conducting an investigation,” according to the Institute of Certified Forensic Accountants.

Although it’s unclear whether the $1.8 billion actually exists, state Treasurer Loftis on the agency’s website says the money is “not missing or recently discovered,” and that his office has been “fully transparent about the matter.”

His office, however, declined The Nerve’s Freedom of Information Act request last year for related bank records, noting in a written response that the records, “to the extent they exist,” related to the $1.8 billion are exempt under the open-records law as an “attorney work product of the Governor’s Working Group.”

McMaster in April last year created a task force made up of representatives from six state agencies, including the Governor’s Office and Treasurer’s Office, to investigate the $1.8 billion and gave the panel a July 1 deadline – which it missed – to find answers.

The disputed money was the subject of a critical 116-page interim report released in April following an investigation by a Senate Finance subcommittee chaired by Sen. Larry Grooms, R-Berkeley. The report accused Loftis of failing to disclose the funds for seven years “despite his explicit statutory duty to do so.”

Loftis, a Republican who was first elected in 2010, has denied any wrongdoing and published a lengthy defense on the agency’s website. Grooms last year publicly called for his resignation.

After Comptroller General Gaines in an October 2023 letter asked Loftis to investigate a related cash balance, the Senate Finance Committee researched the matter and determined the fund had a balance of about $1.8 billion, according to the subcommittee's report.

That discovery followed a separate subcommittee investigation in 2022 into a $3.5 billion accounting error, which, according to the report, stemmed from an earlier conversion to a different state accounting system and occurred during the tenure of ex-Comptroller General Richard Eckstrom, a Republican who resigned in April 2023 after 20 years in office.

In seeking written proposals this year for forensic accounting services, the Department of Administration in its June online post said the $1.8 billion “issue” was identified as “part of the $3.5B restatement.”

As to whether the $1.8 billion actually exists, comptroller general spokeswoman McLeod in her written response last week said, “The Comptroller General’s Office offers no opinion at this time regarding the $1.8 billion.”

Brundrett is the news editor of The Nerve (www.thenerve.org). Contact him at 803-394-8273 or [email protected]. Follow The Nerve on Facebook, Instagram and X (formerlyTwitter) @thenervesc.

Nerve stories are free to reprint and repost with permission by and credit to The Nerve.