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Governor Newsom signed AB 1783, a law inspired by a $2 million bounty that was to be paid to influence the California insurance commissioner, Ricardo Lara, in a transaction involving Applied Underwriters proposed sale. The new law expands California’s lobbying laws to limit this practice.

Companies and interest groups spend hundreds of millions of dollars each year to lobby lawmakers and the governor on issues related to proposed laws and regulations. Most of the money is subject to strict lobbying disclosure rules, including that the people paid to lobby register with the state and that the companies that pay them file regular public disclosures.

An investigation by The Sacramento Bee, however, revealed that loopholes allowed some companies to pay bounties called “success fees” to influence some decisions by state officials without having to report them.

A lawsuit by former California lawmakers Fabian Núñez and Rusty Areias revealed one such payment and provided details on how they work. Nothing in California law required public disclosure of such an incentive. It came to light only because of this publicly accessible civil lawsuit.

The former lawmakers who left public service for private consulting say they were hired by a workers compensation company to convince the Department of Insurance to allow an acquisition deal to proceed. If they succeeded, they say they were promised a $2 million bounty fee.

In their lawsuit, Areias and Núñez’s former firm Mercury say Applied Underwriters and two men seeking to acquire parts of the company hired the former lawmakers in 2019 to help close out the acquisition deal.

Núñez and Areias were tasked with helping the company either secure approval from the California Department of Insurance for the deal or get the department to agree to let the company re-domicile its subsidiary. If they succeeded, they would get $1 million, according to a written contract submitted as evidence in court filings. If they did not, they would not be paid, and the CEO of Applied Underwriters would lose a $50 million deposit he had made contingent on the acquisition deal receiving regulatory approval, according to the lawsuit.

In the suit, they allege that the company and the men they are suing later upped the success fee to $2 million.

Applied Underwriters argued in court filings it does not owe Núñez and Areias money because they did not meet the terms in their contract.

Under existing law, lobbyists are prohibited from charging success fees for achieving a desired outcome for their clients. But because Núñez and Areias’ work wasn’t technically lobbying, they were able to negotiate a bounty fee and would not have to disclose it to the public. Once this was discovered, the scandal attracted much media attention, and more litigation under the Freedom of Information Act by Consumer Watchdog. And ultimately to AB 1783 which claims to limit or put restrictions on this practice.

The Political Reform Act of 1974 was created by California voters when they approved Proposition 9, in 1974. Existing provisions of the PRA impose requirements on lobbyists and lobbyist employers involved in administrative actions, and generally define “administrative action” to mean, among other things, the proposal, drafting, development, consideration, amendment, enactment, or defeat by any state agency of any rule, regulation, or other action in any ratemaking or quasi-legislative proceeding.

Bob Stern, who co-wrote the California lobbying laws approved by voters in 1974, said he doesn’t know how often consultants in Sacramento charge success fees to influence decisions like the one before the state Department of Insurance because there’s no required disclosure.

The new law created by AB 1783 expands the definition of “administrative action” under the Political Reform Act of 1974 to include any decision or approval by the Insurance Commissioner or the Director of the Department of Managed Health Care under these provisions. Both are required to approve certain transactions involving insurers and health care service plans, respectively. The changes in the law appear in Section 82002 of the Government Code.

Numerous legislative attempts were unsuccessfully made over the years to close these loopholes.

One of then, AB 1200 (Gordon) of 2016, would have provided that communicating with state governmental officials in order to influence state governmental procurement, as defined, could result in a person being considered a “lobbyist” under the PRA. It was vetoed by Governor Brown. In his veto message, he stated “[g]iven that the laws regulating state procurement are voluminous and already contain ample opportunity for public scrutiny, I don’t believe this bill is necessary.”