By Peter Byrne, Salon Magazine, March 11, 2005

Northern California political investigative reporter Peter Byrne recently penned a seminal piece for the online magazine Salon on a brewing ethics scandal-in-the-making involving the management of California Governor Arnold Schwarzenegger's $100 million of holdings placed in a blind trust. 

SALON:    "And Wachter certainly has every financial incentive to influence taxation policies and the government regulation of any number of industries, including, say, cellphones, in ways to benefit himself and his client."

GOVERNOR GIRLIE MAN EDITORIAL BOARD COMMENTS:   

Or consider Schwarzenegger's interest in the Arnold Classic, co-owned with several lucrative and prominent muscle and fitness magazines.  These magazines earn significant return on equity, primarily from advertisements placed by supplement manufacturers that oppose further state or federal restrictions on the sales of their products; Schwarzenegger is their official "Executive Editor" at a salary that is still undisclosed. Schwarzenegger last year vetoed legislation of course to implement a new ban on steroid-like supplements, satisfying both the performance-enhancing dietary supplement (PEDS) manufacturers and, indirectly, his magazine partners reliant on advertising from those same PEDS manufacturers.  Wachter can't deny knowing Schwarzenegger's inner thoughts on steroid or PEDS supplements, since he's freely quoted Arnold on the subject to reporters.  It begs the question whether Wachter's ever made an investment decision based on insider knowledge involving any PEDS or nutritional supplement entity, for himself or on Schwarzenegger's behalf.

SALON:    "Yet at the time Schwarzenegger's blind trust was created, he and Wachter were jointly invested in 10 partnerships, including Acacia Partners (which deals in public stocks), Angel Investors (a venture capital firm), Apollo Investment Fund (specializing in leveraged buyouts) and Pinpoint Investors (a stockholder in Cell Guide Ltd., which develops cellphone technology). "

GOVERNOR GIRLIE MAN EDITORIAL BOARD COMMENTS:   

Or review Schwarzenegger's holdings in International Game Technology, a leading manufacturer of slot machines, another glaring example.  IGT's interest in the expansion of gaming into the lucrative California marketplace is undeniable, but how can Wachter separate himself from his role as Schwarzenegger's political caddy and blind trust manager, and adhere to the arms length requirement under the state's ethics laws?  Of course given the current arrangement, Wachter simply can't avoid a conflict of interest since he has access to considerable insider information crucial to the interests of, for but one example, gaming industry suppliers such as IGT, while at the same time he has also a fiduciary responsibility to his real client, which is the blind trust of Arnold Schwarzenegger and Maria Shriver.  Another example that would have placed Wachter in another conflict involved the merger of two HMOs, Wellpoint Health Networks and Anthem.  Governor Schwarzenegger's approval was required of the merger, and Wellpoint, with its subsidiary Blue Cross providing 7 million California patients with health care coverage, is a major client of the DFA equity firm.  What role would Wachter play were Schwarzenegger to seek his advice on the merits of the merger?  Would he be representing Schwarzenegger's blind trust?  or DFA's client role?  or the closest personal outside advisor to the Governor?  There's no way that Wachter could remain truly objective in such a situation.In other words, if Wachter were to learn something that would benefit the Schwarzenegger-Shriver blind trust and he doesn't act on it he fails his obligation to his clients; if he does act on it, though, he violates state ethics laws.  He's either a bum or a crook -- a derelict or a deviant -- no way around it.  Conversely, suppose Wachter were to stop trading altogether, perhaps as a result of the Salon article or other public scrutiny, to avoid a real or apparent conflict of interest resulting from his access to insider information?  That could expose the Schwarzenegger-Shriver $100 to $200 million portfolio to market risks that otherwise would not exist.Either way, under the current arrangement Paul Wachter will have failed one or the other of his obligations.  He either fails his clients, or he fails the public trust.  That is, unless he avoids all contact with either Schwarzenegger or Shriver, and that hasn't happened.  If necessary changes have been made to Wachter's intimate access then it should be made public as well, to end deepening speculation in California political circles that Paul Wachter is about to become toxic.   Then political commentary such as Salon and this discussion would cease.Perhaps Wachter and Schwarzenegger think the term 'arms length' means the length from your shoulder to the end of your fingers, and not the statute's definition of 'completely removed' , 'not involved with'  or 'not in contact with'?And, by the way, just why has California Common Cause and the national Common Cause remained strangely silent on this matter?

SALON:    "In July, Schwarzenegger appointed his blind trustee, Wachter, to the Board of Regents of the University of California, which controls billions in state money."

GOVERNOR GIRLIE MAN EDITORIAL BOARD COMMENTS:  

Paul Wachter couldn't have avoided being right in the middle of the Native American gaming negotiations in mid-summer 2004 -- an overhyped budget-driven deal which notoriously failed to achieve its promised revenue goals.  Could Wachter credibly deny playing a behind-the-scenes advisory role for Schwarzenegger?  Of course with 20 years' experience in the gaming industry, Wachter couldn't help but to want to help his 'best friend' Schwarzenegger with some observations or insight during these intense, complex negotiations.  That's what friends do, right?  Or at least that's what a loyalist like Wachter would do without really thinking about the serious political consequences.Still, the advice Wachter and others provided was seriously flawed, since but a fraction of the $2 billion in funds promised from the gaming plan materialized, and as a result the state's budget situation's worse now than ever.  Of course the result of this miscalculation will be further dramatic across-the-board education budget cuts, disproportionately falling on the University of California system and the state's community colleges.  Ironically, now that Wachter's been appointed to the Board of Regents by Schwarzenegger he'll likely have twelve years of having to vote to raise tuition, cut spending, or reduce enrollment, all part of the slow demise for arguably the top state college and university system in the nation.  Isn't that a nice legacy for Wachter and Schwarzenegger? 

SALON:    "We are not trying to create a blind trust which says the governor and I never met," Wachter says. "Or that I sold all his assets and he does not know anything in his portfolio. Instead, as of the date of his inauguration, he has no involvement with anything in the portfolio."

GOVERNOR GIRLIE MAN EDITORIAL BOARD COMMENTS:  

How does Wachter answer to charges that he advised Governor Schwarzenegger on gaming matters, at the same time having the sole responsibility of managing Schwarzenegger's investments in the gaming industry?   Wachter's responsible for Arnold Schwarzenegger's five percent stake in Dimensional Fund Advisors, or DFA, a $40 billion investment fund, including significant holdings in -- you guessed it -- gaming and resort interests.  Again, Wachter himself reports over $1 million in DFA holdings.As has been noted in several investment publications, a typical management fee is .5 percent paid by investors to DFA.  For managing $40 billion, DFA receives fees from investors in the ballpark of $200 million per year; Governor Schwarzenegger's share of fees is perhaps $10 million annually, a figure that is conveniently hidden in the broad disclosure ranges of California's public disclosure forms, and can easily be manipulated as a form of deferred compensation when Schwarzenegger returns to private life.  Governor Schwarzenegger reported at least $100,000 in dividends from DFA in 2004.Moreover, since Schwarzenegger's annual $10 million cut is apparently in the form of additional equity shares rather than in direct cash outlays, the true figure of just how much Arnold Schwarzenegger gains from his DFA relationship is known only by a handful of DFA's top officers and, of course, Paul Wachter. Of course the natural path of inquisition should focus first on whether Schwarzenegger personally gained financially from his blind trust manager having insider access to the daily inner workings of Schwarzenegger's thinking.  However, the person who's more likely to directly benefit in relative terms may actually be Paul Wachter, who'd have to always resist the natural temptation to use insider information to feather his own investment nest egg.If over your entire life you've instinctively traded various investment vehicles based on the accumulation of closely-held important information, it's not easy to all of a sudden stop making trades, especially when you're the Governor's primary gatekeeper. 

SALON:    "When a new disclosure statement is released in March [of 2005], says Wachter, it will show which of the original assets placed in the blind trust have been sold and which have been retained. "

GOVERNOR GIRLIE MAN EDITORIAL BOARD COMMENTS:  

It's really quite simple: in the management of Schwarzenegger's $100 to $200 million in asset holdings (or in his own personal $1 million investment) in Dimensional Fund Advisors, has Paul Wachter ever acted based on information obtained as a result of his close intimate access to Governor Schwarzenegger? Of course Wachter will reflexively deny ever doing so, but how and why are we to believe him?  And until no such possibility of personal financial gain from insider knowledge exists, legitimate questions should be asked of both Schwarzenegger and Wachter.Furthermore, the last person that Arnold Schwarzenegger can afford to cut loose is the guy who knows his most personal intimate "I have behaved badly" secrets.  Apparently and not surprisingly Wachter is said to be the person Schwarzenegger trusted enough to oversee the coordinated campaign to first identify and then compile a comprehensive list of probable groping accusers.   Then a sophisticated and very sensitive effort was designed to engage, sometimes intimidate, and ultimately contain several other women who might otherwise have come forward with details of the Governor's days of "behaving badly." Most of these unnamed groping victims others describe as still in the entertainment business -- silenced perhaps for fear of some form of retribution.  It's not a coincidence that of the 16 women who bravely came forward in the weeks before the 2003 Recall election to validate Schwarzenegger's years of sordid groping and abusive behavior, almost all were no longer working in 'the industry'. It's beileved that there are at least three more women with horrifying detailed experiences who, for whatever reason, signed consent agreements to not come forward with their Schwarzenegger-groped-me story.  Schwarzenegger would only delegate such a responsibility to  someone he could trust to be discreet, methodical, and, when necessary, ruthless.  Which is why Schwarzenegger can't afford to simply cut Wachter loose.In other words, Wachter more than anyone else knows where all the groped bodies are buried. 

SALON:    "You don't have to liquidate everything," Wachter carefully points out.

GOVERNOR GIRLIE MAN EDITORIAL BOARD COMMENTS:   

No one would accuse Wachter of not realizing how much he's gained financially from blind loyalty to Schwarzenegger -- even if he fails to comprehend the serious consequences  for his 'best friend' Schwarzenegger resulting from such loyalty.   Only now the combination of Wachter's blind loyalty and the responsibility of managing Schwarzenegger's $100 million blind trust is a self-inflicted scandal that can't be explained away with another of the Governor's flippant "I behaved badly" apologies. Moreover, why is only Wachter the only person qualified to administer the Schwarzenegger-Shriver blind trust?  There are literally thousands of other competent men and women available who could be trusted with such a responsibility. 

SALON:  Quoting Paul Wachter: "The key point of a blind trust is that the governor is supposed to be kept away from real and apparent conflicts of interest."

GOVERNOR GIRLIE MAN EDITORIAL BOARD COMMENTS:   

Excuse me?  If the concern is avoiding apparent conflicts of interest, you're not even close, Mr. Wachter.  And what of the need for Wachter, a state Board of Regent, to also be kept away from real and apparent conflicts of interest?This time Governor Schwarzenegger can't order an investigation of himself like he did with the groping scandal, only to cancel that investigation weeks after winning the Recall election. Ooops.   Used up that "Get Out of Jail Free" card already.Ordinarily, in a well-run political organization, there'd be someone to intervene with the principal, in this case Governor Schwarzenegger, and the apparent problem-causer, Wachter.  That's most unlikely in this case because of the retribution that Wachter would impose on anyone who challenges him, especially since the Salon interview indicates that Wachter remains totally blind to blind trust conflicts-of-interest..  And Schwarzenegger will align with Wachter, not necessarily because the Governor's afraid of Wachter spilling everything he knows about his 'best friend's bad behavior.'   It's more likely because as someone new to government service, Schwarzenegger probably views ethics laws as trivial inconveniences rather than a guard against being victimized.So don't expect someone at the level of former Secretary of State George Schultz to counsel the Governor at Brentwood Canyon Estates -- "Well, Governor, I was reading this Governor Girlie Man website and there's this issue you need to resolve........"

SALON:  Quoting Paul Wachter: "You do not want people even to feel like there might be a conflict of interest."

GOVERNOR GIRLIE MAN EDITORIAL BOARD COMMENTS:

Remember, this is a crowd that has big problems admitting to big problems.Even if that high-level intervention has occurred already, Wachter's had a year of incomparable insider access and, even if unaware at the time of the impropriety of trading on tips, Wachter has in all likelihood made decisions about changes to Schwarzenegger's vast fortune based on his acquired insider knowledge.  Imagine if White House Chief of Staff Andy Card oversaw President Bush's investment portfolio, while also day trading from the West Wing on his own stocks and bonds on tips the President gave him in conversation.  That's not happening of course, but if it were the country would be justifiably outraged.  That's why ethics laws play a helpful role in maintaining the public trust   So that's what's in play here with Wachter and Schwarzenegger, except there's no apparent public outrage or ethics oversight yet because it's not been in a major California newspaper.  But it will.  You can bet on it..When Wachter declares, "You do not want people even to feel like there might be a conflict of interest" who is he kidding?

SALON:   "Despite Wachter's words, his close relationship with Schwarzenegger certainly presents at least the appearance of a conflict of interest."

GOVERNOR GIRLIE MAN EDITORIAL BOARD COMMENTS:

This story broke in mid-February, 2005, and it's said Governor Schwarzenegger continues to work from the Oak Productions offices, with Wachter by his side, at 3110 Main Street in Santa Monica at least two or three days a week when he's not traveling.   Wachter, for his part, remains blissfully unaware of the dilemma he's created for the Governor, and for himself. 

Instead of making a self-correction, Wachter openly flaunts California's ethics laws, and then seemingly taunts those with ethics oversight authority. Once a bully, always a bully.Of course unsolicited advice from someone like me, who for the next several years plans to portray Arnold Schwarzenegger in a pink dress and high heels, won't go over too well with Team Schwarzenegger, a crowd that has big problems admitting to big problems.  They'll likely respond by digging in their heels.  Pink high heels, undoubtedly, in a pique of denial.Again, this scandal is destined to become much more of a story, a credit to the insightful reporting of Salon's Peter Byrne.

The fact that Paul Wachter's about to be thrown to the wolves as Schwarzenegger's seasoned political team stands idly by is not lost on this observer.  Couldn't happen to a more deserving and less likeable guy