Jan. 15 (Bloomberg) -- The U.S. Securities and Exchange Commission is probing the sale of toxic debt to a New Mexico public pension fund by a firm whose employees and spouses contributed at least $15,100 to Governor Bill Richardson’s presidential campaign.

The SEC’s Denver office is conducting the inquiry to determine whether Chicago-based Vanderbilt Capital Advisors LLC broke federal securities laws, according to a letter filed as an exhibit in a whistleblower suit unsealed yesterday.

Frank Foy, the former chief investment officer of New Mexico’s public schoolteachers’ fund, alleged that he was pressured by a Richardson appointee to purchase $50 million in collateralized debt obligations from Vanderbilt, a unit of Boston-based Pioneer Investment Management.

The SEC asked Foy for “all documents relating to investments by the state of New Mexico in or with Vanderbilt Financial and any related entities,” according to a Dec. 1 letter from the SEC’s Denver branch chief, Jeffrey Lyons.

Lyons didn’t immediately return a call seeking comment. Kurt Florian, Vanderbilt’s chief operating officer, declined to comment.

Richardson, a Democrat, withdrew from consideration as President-elect Barack Obama’s commerce secretary on Jan. 4, citing a pending investigation of a bond advisory company that won $1.5 million in state work. That firm, CDR Financial Products, contributed to Richardson’s efforts to register Hispanic and American Indian voters and pay for expenses at the 2004 Democratic National Convention, according to campaign finance records.

Suit Allegations

Foy alleged that the state’s Educational Retirement Board and a council that manages the state’s permanent trust funds lost $90 million investing in a CDO sold by Vanderbilt. The State Investment Council bought $40 million of the securities. The investments proved “worthless,” the suit, filed in State District Court in Santa Fe, said. Foy seeks to recover $300 million for New Mexico taxpayers and would get a share of the recovery.

“The pressure to invest in Vanderbilt was motivated by illegal and improper inducements -- kickbacks or bribes in the form of campaign contributions,” the complaint, filed July 14, said.

Gilbert Gallegos, a Richardson spokesman, said yesterday the suit was meritless and state attorney general declined to intervene on Foy’s behalf. Foy’s lawyer is a “partisan Republican,” he said.

‘Acted Properly’

“The Governor is confident that the state agencies in this lawsuit acted properly and in the best interest of New Mexicans,” Gallegos said in a statement. “This lawsuit, filed by a disgruntled former employee who was accused of serious misconduct during his time as a state employee, makes absurd claims against state agencies. The state will vigorously defend those agencies.”

Collateralized debt obligations, also known as CDOs, are packages of asset-backed securities that bundle debt, including subprime mortgages, bonds and other loans.

The Educational Retirement Board voted 4-2 in May 2006 to invest in the Vanderbilt CDO over the objections of Foy and the funds’ staff, the suit said. Beginning nine months later, five Vanderbilt employees and two of their spouses contributed $15,100 to Richardson’s presidential campaign, federal election commission records show.

Campaign Refund

The campaign refunded $2,000 of the donations in February 2008, records show, after they exceeded federal contribution limits.

Vanderbilt sold the state the riskiest part of a CDO, known as the equity tranche, backed by residential mortgages, Foy alleges. The firm misled the state saying, among other things, that it carefully analyzed and screened the underlying assets and risks were covered by insurance or credit default swaps.

To contact the reporters on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net.

Last Updated: January 15, 2009 16:46 EST