POLITICS AND A PUBLIC PENSION FUND
For 24 years in county politics, including eight years as mayor, Jim Rout was an open book, as politicians go. Reporters calling him could often get him on the first or second ring, as I did this week. He would answer almost any question, personal or political. He's been out of office for almost two years but finds himself involved in a federal investigation of the county pension fund and a personal $25,000 investment he made.
Why now? Did the times change or did Rout change? Probably both. The Watergate effect met the wealth effect, and Rout may have a Martha Stewart problem.
The Watergate effect, as explained a few years ago by former federal prosecutor Mike Cody, was an offshoot of the Richard Nixon presidency. "Under-the-table practices of long-standing became the focus of investigation and criminal enforcement. The public and juries began holding politicians and public officials to a higher standard. Things were perceived as illegal that before had just been winked at."
In the Eighties and Nineties, the Watergate effect produced a string of federal prosecutions of public officials in Tennessee, including then-congressman Harold Ford Sr. These days the feds' high-profile targets are corporate executives like Martha Stewart and, in Memphis, former and possibly current county government officials.
The wealth effect was a product of the soaring stock market before the tech bubble burst in 2000. County government officials including Rout and his top assistant Tom Jones were intimately involved in several big-money deals including FedExForum, AutoZone Park, the aborted Grammy museum, and the Memphis Cook Convention Center. Many of the executives, consultants, underwriters, and attorneys involved in these projects make over $1 million a year and get lucrative stock options. Public officials make $100,000 to $150,000 a year Ñ a good salary by most standards, but not in this league. Many times Jones and Rout and their city counterparts would work long hours, shoulder-to-shoulder with the corporate crowd. Public participation was vital to the deals. The salary gap had to sting.
The fact that Rout invested $25,000 in a startup company shows he was not immune to the wealth effect. For that money in 1999, he could have bought stock in FedEx or AutoZone (and doubled or tripled his money today), but, like many investors, he was dazzled by the long chance. He was, at the least, unwise to get his investment back before the company went bankrupt. Like Martha Stewart, he should have taken the loss. Making matters worse, the company was in the portfolio of Delta Capital Management, one of 12 managers hired by Rout and others to invest the $786 million county pension fund. Rout was interviewed by federal investigators in March. On July 7th, David Pontius, the county employee who administers the pension fund, will meet with a federal grand jury. He said he expects to be asked about Rout and Delta Capital.
Rout has pushed the ethical envelope before. In his last year as mayor, he traveled to Australia with his wife Sandi, insisting the trip was strictly business. He once suggested his wife's travel expenses were legitimate public costs because she was the "first lady." He later reimbursed the county for some of her expenses by drawing from his campaign fund.
No local politician can avoid ties to local businessmen, but Rout's are closer and more personal than most. He owes his last two private-sector jobs to political benefactors. He is currently president of Jack Morris Auto Glass. Morris was a major fund raiser for Rout as well as current Shelby County Mayor A C Wharton. Before he became mayor in 1994, Rout was president of Behavioral Health Group. His benefactor was Dr. William H. Rachels, a wheeler-dealer in health-care companies, Memphis politics, and real estate. Rachels, finance chairman for Winfield Dunn's successful Tennessee gubernatorial race in 1970, was chairman of Health Industries of America when it spun off Behavioral Health Group in 1988. Rachels hired Rout to run it.
From 1988 until 1992, 39 percent of Behavioral Health Group was owned by Stephens Holding Company, a Little Rock-based financial conglomerate. A subsidiary, Stephens Capital Management, was hired by Shelby County to help manage the pension fund. Rout, a county commissioner at the time, was a member of the investment committee which made the recommendation. Some county employees and local stockbrokers publicly questioned the appearance of favoritism and the high-risk stocks that were Stephens' specialty, but their objections were overcome.
When he became mayor, Rout sold Behavioral Health Group to Stephen Winters, owner of Medshares, a home-health-care company across the street on Union Avenue Extended. By then Rout was the sole stockholder. He wouldn't disclose terms of the sale.
All of this was reported by the local press, but the issues never got traction. Then.