Questioned by The Hill, several disclosure
law experts said financial institutions set up in the
same fashion as the McCarthy Group Inc. do not appear
to meet the definition of an excepted investment
fund, at least as the committee had defined
the category until Monday.
Hagel has not been accused of any legal
or ethical violation and his staff denies that there
has been any wrongdoing.
William Canfield, a former Senate Ethics
Committee staffer, said the committee originally intended
an excepted investment fund, an exemption
to cover mutual funds that buy or sell thousands of
different holdings over the course of a year.
Hagel, who was reelected last November
by a lopsided majority, declined to comment on the ethics
The McCarthy Group Inc. owns fewer than
Hagels filing underscores the currently
murky world of Senate disclosures rules in which definitions
are subject to change and interpretations can be accepted
without further question.
However, that definition has apparently
changed under the panels new staff director, Robert
Walker. who met with Hagels staff after The Hill
began its inquiries.
Under either the old or new definition,
Lou Ann Linehan, Hagels chief of staff, denied
that Hagel had failed to meet the Senate Ethics Committees
reporting requirements in his annual financial disclosure
Linehan emphasized that Hagels financial
forms had been reviewed and approved by the Ethics Committee.
We did it according to what the
Ethics Committee told us to do, she said: I
have box loads of paper from all the times we went down
there and had them sign off on it. We went down and
talked to them. If there is a mistake, we havent
made a mistake. The ethics people made a mistake.
One underlying issue is whether Hagel
properly disclosed his financial ties to Election Systems
& Software (ES&S), a company that makes nearly
half the voting machines used in the United States,
including all those used in his native Nebraska.
ES&S is a subsidiary of McCarthy Group
Inc., which is jointly held by the holding firm and
the Omaha World-Herald Co., which publishes the states
largest newspaper. The voting machine company makes
sophisticated optical scan and touch-screen vote-counting
devices that many states have begun buying in recent
An official at Nebraskas Election
Administration estimated that ES&S machines tallied
85 percent of the votes cast in Hagels 2002 and
1996 election races.
In 1996, ES&S operated as American
Information Systems Inc. (AIS). The company became ES&S
after merging with Business Records Corp. in 1997.
In a disclosure form filed in 1996, covering
the previous year, Hagel, then a Senate candidate, did
not report that he was still chairman of AIS for the
first 10 weeks of the year, as he was required to do.
Under the ethics panels regulations,
an excepted investment fund is one that
is: publicly traded (or available) or widely diversified.
Hagels compliance with prior Senate
regulations hinges on whether the holding company is
indeed publicly available and therefore may be properly
listed as an excepted investment fund.
As recently as last Thursday, the committee
defined a publicly available stock or investment
as one that can be bought on a public market or for
which information is publicly available.
For a stock or investment to be regarded
as publicly available under the panels
previous definition the committee should be able
to find publicly available information on the companys
That definition comported with one provided
by Stanley Brand, a prominent ethics lawyer who has
advised many lawmakers on how to fill out their personal
financial disclosure reports.
Brand said an investment is publicly available:
If it is purchasable. If there is a market for
It could be a regional exchange.
It could be a commodities market, he said.
Brand said it would be hard to show an
investment is excepted if its so closely
held that it doesnt have a readily ascertainable
value and theres not a way to trade it on a market,
even a regional market or in an electronic way.
That kind of information would be found
in such standard reference outlets as Moodys Financial
Services Information, Standard & Poors register,
or Barrons The Dow Jones and Financial Weekly.
A searchs of all three revealed
no references to the McCarthy Group Inc.
Furthermore, a comprehensive report ordered
by The Hill from Dun & Bradstreet, a leading financial
information firm serving creditors and investors, indicated
that McCarthy Group Inc.s financial information
is not publicly available.
The report, dated last March, states that
McCarthy Group Inc. controller Barb Mcqueen declined
to provide any information of the kind that an outside
investor would normally need in weighing the companys
To back up her argument that McCarthy
Group Inc. need not be listed with a financial reference
and yet still qualify as publicly available, Linehan
noted the instructions that come with the Senate disclosure
They state: If you are unable to
ascertain through publicly available reference material
or an investment advisor or broker whether an asset
is publicly available, you may wish to report it, along
with the additional information.
The instructional language suggests that
a lawmaker report the underlying assets of an investment
if it is difficult to determine whether it is publicly
But Linehan claimed that she was sure
at least one investment advisor and broker confirmed
that McCarthy Group Inc. was publicly available. She
was unable,however, to offer the name of any investment
broker or advisor who consulted with Hagel or his staff
on the matter.
Linehan was unable to provide any examples
of outside trades in the firms securities.
Instead she cited a revised standard implemented
by the committee only this week, after The Hill began
On Monday, the committee changed its definition
of excepted investment fund after Walker
met with Linehan. Baird served as the panels director
for nearly 16 years.
The committee abandoned the more stringent
definition of the term, which under the panels
rules, Hagel apparently failed to meet.
Under Walkers revised definition,
the committee will decide, based on the specific facts
of each case, whether an investment has been made in
a publicly available firm, a circumstance that would
allow it to be listed as an excepted investment
fund. But the panel will neither discuss any individual
case nor offer any concrete standard under which a case
may be judged.
Both definitions, while arcane, are at
the core of the matter because they determine whether
the two-term senator is obliged to disclose his underlying
investment in ES&S, rather than merely cite McCarthy
Group Inc., the holding company.
The newly weakened definition makes it
virtually impossible to determine whether Hagel
or any other lawmaker must report investments
in non-traded private companies.
Several securities law experts, including
Michael Perino, a professor teaching at Columbia University
Law School, said publicly available is a
term coined by the ethics panel that only it can define.
The evolving standard, which the Ethics
Committee has yet to put down on paper or codify, reveals
the murkiness of some ethics rules and how difficult
it can be to determine if a lawmaker transgressed, even
though a violation may seem unquestionable at first
Michael R. McCarthy, chairman of the McCarthy
Group Inc. and Hagels campaign treasurer, acknowledged
that the holding company is not publicly traded or widely
diversified (under the committees definition),
but claimed that it is publicly available.
Our company is a privately held
company where the shares are available to the public,
said McCarthy. Our shares trade each year. Its
not SEC registered but its available to the public
by private exchange or private treaty.
McCarthy said Hagels $1-5 million
investment made him a minor shareholder.
Hagels ties to ES&S go beyond
his financial stake. He served as its chairman when
it was named AIS from the early 90s until March
of 1995. He also was an investor in AIS Investors Inc.
until the beginning of 1995, McCarthy said.
Hagel also served as president of McCarthy
& Co, the financial advisory group, from July of
1992 until the beginning of 1996.
Campaign finance reports show that McCarthy
has served as treasurer for Hagel for Nebraska and later
Hagel for Senate from 1999 until as recently as December
McCarthys son, Kevin, works in Hagels
Hagels unrecorded stake in the voting
systems company poses an apparent conflict of interest
on election reform issues.
Three companies, including ES&S, stand
to make a large profits from election reform legislation
enacted last year by Congress.
Many precincts around the country are
expected to upgrade to optical scan and touch-screen
voting machines as a result of recently enacted election
Theres the potential for a
real gold rush for federal voting equipment manufacturers,
said Doug Chapin, director of Electionline.org, a clearinghouse
of news on election reform sponsored by the Pew Charitable
ES&S is one of three companies, along
with Diebold Election Systems and Sequoia Voting Systems,
that will benefit from the trend.
Linehan called absurd the notion that
Hagel attempted to hide his involvement in ES&S.
Theres no secret here,
said Linehan. The other big investor in ES&S
is the Omaha World-Herald. Its not a secret. They
are the owners in McCarthy Group and ES&S.
Linehan also noted that the Omaha World-Herald had previously
reported Hagels ties to ES&S and that McCarthy
Group Inc. reveals on its website that ES&S is a
However, Linehan acknowledged that McCarthy
Group Inc. has provided that information on the web
only since 2000. By then, Hagel had already filed five
personal financial disclosure reports listing McCarthy
Group Inc. as an excepted investment fund.