Ohio's "Coingate" Scandal: How It Exposes the Flaws of Our Campaign Finance System

For over a decade, the Republican Party has enjoyed a virtual lock on statewide offices in the State of Ohio. Now, however, the state GOP finds itself mired in a scandal that threatens to embroil not only Governor Bob Taft, but also such prominent out-of-state politicians as Governor Arnold Schwarzenegger and even President Bush.

The scandal revolves around Tom Noe, a rare-coin dealer who has given generously to Republican candidates for state office, federal office, and even judicial seats over the years. Noe was given authority to invest $50 million in the State of Ohio's funds in rare coins and other collectibles such as baseball cards.

But in April, the Toledo Blade reported that two of the state's investments, gold coins valued at $300,000, had been lost in the mail. And Noe's own lawyers have since acknowledged that up to $12 million in assets from the state's investment fund can't be accounted for.

Meanwhile, Schwarzenegger has not yet returned Noe's contributions. And while Bush has given back the $4000 Noe and his wife contributed to his campaign, he has refused to disgorge the over $100,000 Noe raised for him.

Democrats are asking whether some of the missing state funds were diverted to the President's reelection campaign or to other Republican candidates. In addition, federal prosecutors are working in cooperation with state authorities, to determine whether campaign finance laws were violated.

Republicans will undoubtedly attempt to portray the still-unfolding Noe coin scandal as an isolated incident. And Democrats will try to use it to make inroads into the Republicans' iron grip on the levers of power in Ohio.

In truth, however, the scandal says much more about the systemic defects in our democracy than either major party is willing to acknowledge.

The Noe scandal exposes the ugly underbelly of our pay-to-play system, including the way that campaigns are financed, judges are chosen, and laws are enforced (or not enforced). As I will explain, it also suggests several ways in which that system urgently needs to be reformed.

Paying to Play: How Tom Noe Gained Influence

A college dropout, Tom Noe developed a successful coin shop in a strip mall west of Toledo in the 1980's. He learned early how valuable it was to have friends in power, persuading the legislature to exempt coin sales from the state tax in 1989.

By the early 1990's, however, Noe had fallen on hard times. The Blade reports that, in 1992 he was over $16,500 in debt, down from a net worth of $2.4 million just a few years before, with an income that no longer matched his lavish spending habits. With his business having suffered "a huge loss" and his first marriage coming to an end, Noe was forced to move from his custom-built suburban home to a modest apartment in West Toledo.

Yet even with his finances in shambles, Noe kept giving money to the Republican Party and its candidates, to the tune of $29,200 in 1991 and 1992.

And his close affiliations to Republican politicians were good for business: As he put it in sworn testimony during his divorce proceedings, "I think it's kept me alive." These contributions, along with his appointment as chair of the Lucas County Republican Party in 1993, were essential in developing business contacts and rebuilding his business.

In the years that followed, Noe remarried and continued to give generously to Republican candidates. He and his second wife, Bernadette Noe, have personally given more than $200,000 to candidates, party organizations, and political action committees over the past fifteen years. Among the beneficiaries were all three of the top GOP officeholders who are now candidates for Ohio Governor in 2006: Attorney General Jim Petro, State Auditor Betty Montgomery, and Secretary of State Ken Blackwell.

Noe and his wife also contributed $4000 to President Bush's successful campaign for reelection in 2004. And Noe served as chairman of the Bush-Cheney reelection campaign in northwest Ohio - indeed, he was deemed a "Pioneer" for having raised at least $100,000 in contributions to the President.

Money is not the only thing that Noe contributed to President Bush's reelection campaign. Before the 2004 election, the Sandusky County Democratic Party brought suit seeking to require Secretary of State Blackwell to count provisional ballots even if cast in the wrong precinct. Republican candidates - including President Bush - were widely perceived as likely to benefit from Blackwell's stringent vote-counting rule. Noe intervened to support Blackwell's position.

Ultimately, the U.S. Court of Appeals for the Sixth Circuit agreed with Blackwell and Noe. Given Bush's 119,000 vote margin of victory, the decision probably netted the President a few thousand votes - though the election's outcome would have been the same, regardless.

Noe's contributions to his party did not go unnoticed by those in power. In addition to garnering leadership positions in the Republican Party, he was appointed to the Ohio Turnpike Commission and - despite his having dropped out after only two semesters - also earned an appointment to the Bowling Green State University board. In 1995, he was appointed to the Ohio Board of Regents (Noe's the one seated fronted and center in the photo), which has authority over Ohio's educational system, including the management of state funds.

What got Noe into trouble was not these appointments, however - which are, sadly, typical of the you-scratch-my-back-I-scratch-yours arrangement that has become

an accepted part of contemporary politics. It was the manner in which he invested $50 million in state worker's compensation funds.

The Game Is Up: It's Discovered that Ohio Funds Have Gone Missing

In 1997, the Ohio Bureau of Workers' Compensation started an emerging managers program, allowing for alternative investments in addition to traditional stocks and bonds. Noe created the Capital Coin Fund to buy and sell coins, hopefully at a profit. Under this contract, 80% of the profits from the fund were supposed to go to the state worker's compensation fund, with the remainder going to Noe's business.

Even this arrangement, itself, did not raise eyebrows. Indeed, awarding investment contracts to those who give to Republican candidates is a common phenomenon. The Cleveland Plain-Dealer has reported that two-thirds of the 212 investment managers hired gave to Republican candidates, to the tune of almost $5 million between 1997 and 2004.

What did raise eyebrows, finally, was that some of those coins and funds turned up missing. As noted above, two coins, valued at $300,000, were "lost in the mail." Meanwhile, another $850,000 in state funds had been written off.

(This isn't the first time that Noe's coins have been lost or stolen. As described in this Sixth Circuit opinion, Noe claimed to his insurer that over $200,000 in cash and currency was stolen from the back seat of his Oldsmobile in 1996 while it was parked in his driveway.)

Lessons from the Noe Coin Scandal

The Noe scandal's larger significance is that it illuminates dubious practices that have become an accepted part of our political culture. For those who care about promoting a democracy that is accountable to the people and free from corruption, three major policy recommendations emerge:

1.   Major contributors to political campaigns should be disqualified from receiving appointments or investment contracts. When big-money donors are appointed to positions of power or reap financial benefits from state investments, it creates the impression that government is for sale to the highest bidder. Tom Noe provides a graphic example: As noted above, he was appointed to Bowling Green State University's board and even the State Board of Regents, despite the fact that he had completed only two semesters of college. Even more egregious is the state's decision to invest in his rare coin fund, from which Noe's business profited handsomely.

We may never know whether there was a quid pro quo for Noe's campaign contributions - it is unlikely, for example, that the ongoing investigation will find a smoking gun that links a specific contribution by Noe to his appointment to the State Board of Regents, or to the award of a particular investment contract. But protecting the integrity of government requires strict prophylactic rules to guard against such potential corruption.

One promising reform would be to ban the practice of campaign contributors and paid lobbyists being appointed to public boards. In fact, the new mayor of Los Angeles has suggested something along these lines, proposing to ban registered lobbyists from serving on city commissions. Another possibility, now being proposed in Ohio, is to bar major campaign contributors to from being appointed to state boards or from receiving investment contracts.

If other states wish to avoid the sorry example of Ohio, they would do well to pay attention to potential self-dealing in how investments and appointments are made.

2.   Federal campaign finance laws should be enforced - and upheld against future court challenges. Another lesson from the Noe scandal is the need to enforce existing laws designed to keep the pay-to-play system in check. In 2002, Congress enacted the Bipartisan Campaign Reform Act ("BCRA"), which strengthened pre-existing law by stopping the flow of "soft money" - previously unregulated contributions to political party organizations, formed to circumvent contribution limits. In plain English, the law made it harder for corporations, unions, and wealthy individuals to get around contribution limits.

Federal law also prohibits people from making a "contribution in the name of another." Someone who has contributed the $2000 maximum to a candidate, for example, can't get around this limit by funneling money through his spouse, children, or friends. Federal authorities are now looking into whether Tom Noe did just that, in the fundraising efforts that led him to be named a Bush Pioneer. Their attention has focused on an October 2003 fundraiser in Columbus, hosted by Noe, at which $1.4 million was raised for the Bush campaign. Under investigation is whether Noe gave money to others to give to the President's reelection campaign, in violation of federal law. It's even possible that some of that money came from the state's own coffers, though no one has yet proven that such a money trail exists.

Was President Bush's successful election campaign supported by illegal contributions raised by Noe? We don't know the answer to that question yet. What we can safely say is that, had it not been for the loss of state funds under Noe's control, the possibility of illegal contributions to the Bush campaign would never have been investigated. Yet contributions made "in the name of another" are illegal, whether or not the money derives from state coffers.

Federal prosecutors and investigative agencies need to be more vigilant, in looking into potential violations of existing campaign finance laws. In particular, it is vital that they be given the resources necessary to investigate Bush Pioneers and comparable rainmakers on the Democratic side, to determine whether these fundraisers are in fact making an end-run around campaign finance laws.

Even more important, the Noe scandal supports the U.S. Supreme Court's decision to uphold current federal campaign finance laws. In McConnell v. FEC, the Court upheld the BCRA on the ground that it was tailored to advance the important government interests in preventing both corruption and the appearance of corruption. With Justice O'Connor's retirement, that opinion - in which she cast the pivotal fifth vote - is now in jeopardy. The Noe Scandal provides retrospective support for her vote, and should inform the Court's deliberations, if and when McConnell is revisited in years to come.

3.   The practice of electing judges through privately financed elections must end - or at a minimum, recusal must be automatic. Noe is now embroiled in a multitude of lawsuits arising from the coin scandal. Among other effort, he is attempting to prevent newspapers from gaining access to records, in their continuing efforts to unravel the scope of his business and investment activities.

In the federal system and in some states, judges don't run for election; they are appointed to life terms, a practice that promotes judicial independence. The problem is that, in Ohio and many other states, judges are elected. They must rely on contributions from private donors to support their campaigns, when they run for election and when they seek retention.

Five of the seven current Ohio Supreme Court justices (all five Republicans) were beneficiaries of Noe's and his wife's largesse - receiving over $23,000 in contributions from the couple. Noe was even the 2004 campaign chairman for current Justice Judith Ann Lanzinger.

When a case by the Toledo Blade seeking access to Noe-related records came before the Ohio Supreme Court, all five of the justices who had received contributions from him properly recused themselves. What's interesting, however, is that the justices do not routinely recuse themselves when parties who have contributed to their campaigns appear before them. To the contrary, the Chief Justice of the Ohio Supreme Court maintains, "It is not necessary for a judge to recuse himself just because an attorney or party has contributed to his campaign." It seems, then, that it was only the fact that this was a high-profile case with unseemly political implications that led the justices to recuse themselves.

When litigants or attorneys give large sums to the judge before whom their case is heard, it inevitably raises the appearance - if not the reality - of corruption. Electing judges through privately funded campaigns can only fuel the perception that justice is for sale.

The best solution would be to end the practice of electing state judges altogether. At the very least, states that choose to elect judges should provide public financing for campaigns, so that those judges are not beholden to wealthy donors once they ascend to the bench.

In the meantime, judges whose campaigns benefit from private largesse should automatically recuse themselves from cases in which their contributors appear as litigants or attorneys.