Financial Reform Regulators and Fake 'AstroTurf'

Political campaigns, public-relations firms, and lobbyists sometimes gin up letter-writing campaigns to create the appearance of grassroots support for their points of view. The practice of astroturfing, as it's known in Washington, backfired on one of its practitioners last month, when letters purportedly signed by small business owners and prominent citizens from Arkansas, asking derivatives regulators for tough rules against financial firms, were found to be forgeries.

Left holding the bag was Dewey Square Group, a Boston public-relations firm hired to influence the Commodity Futures Trading Commission. The agency had sought comment on a proposal to limit the ownership of banks and other financial firms in clearinghouses that will process over-the-counter derivatives trades, a proposal that stems from the Dodd-Frank regulatory reform law. Dewey Square says the letters were the work of a subcontractor and didn't know they were fake. Dewey Square would not identify the client for whom the campaign was conducted. Nasdaq OMX Group (NDAQ)was among the companies that lobbied Congress on the clearinghouse issue. Nasdaq is the majority owner of a swaps clearinghouse; it declined to discuss whether it hired Dewey Square. The CFTC removed the forgeries from its website and referred the case to the Justice Dept.

The letters—purportedly from an H.J. Heinz (HNZ) executive, a Burger King (BKC) franchisee, and at least five other Arkansas officials or businesses—were sent to the CFTC in November. Some letters contain identical passages criticizing banks for their "cartel-like control" of the $583 trillion derivatives market. The letters were supposedly signed by an Arkansas circuit court judge, a county sheriff, and a mental health counselor. They all said their signatures had been forged.

Dewey Square principal Ginny Terzano said her firm ran a multistate grassroots advocacy campaign and hired Goggans, a Little Rock lobbying firm, to help. The forged letters were sent by a contractor working for Goggans, says Miles Goggans, the firm's founder. He said he was not aware that the letters were forgeries. "I deeply regret what this has done to these Arkansas businesses and individuals, and deeply regret that this inexcusable conduct occurred in the course of work I performed for Dewey Square," said Goggans. In a statement, Terzano said that "Dewey Square had no reason whatsoever to believe that the letters were not authentic and had no knowledge that they were in fact unauthorized until questions were raised in media accounts."

Judge Marilyn Edwards of Washington County, Ark., whose signature was forged, says she spoke to the FBI about the letters. "I'm not a very happy camper about this."

The bottom line: A so-called astroturf lobbying effort shows much is at stake as regulators write derivatives rules.

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