CIRM Conflict Legislation Wins Support From Key State Official

California's top financial officer, John Chiang, is backing legislation aimed at dealing with conflicts-of-interest at the state's $3 billion stem cell agency.

Alex Philippidis, editor of the BioRegion News, reported on Monday that state Controller Chiang believes that the bill by Sen. Sheila Kuehl, D-Santa Monica, is the "best hope" for eliminating conflicts of interest at the agency. The legislation, SB 1565, has already cleared the state Senate on a 40-0 vote and is now before the Assembly.

Among other things, it would require the state's Little Hoover Commission to examine CIRM and make recommendations by July 2009 for changes in its structure and operations.

Philippidis quoted Chiang spokeswoman, Hallye Jordan, as saying,

"The controller believes that the public accountability is critical to ensure public confidence in the stem-cell program, that their dollars are being spent on finding cures through stem cell research, rather than benefiting individual biotech companies or institutions that are conducting the research. Transparency and accountability to the public about how their dollars are being spent is important."

Philippidis continued:

"'If the public is not confident that their investment is being adequately protected and that they’re not going to see any financial benefits from the research as promised, then the public is likely going to be less inclined to support funding future research,' Jordan said."

Chiang, a Democrat who was elected in a statewide vote, and John M. Simpson of Consumer Watchdog filed complaints with the state Fair Political Practices Commission last year concerning a violation of CIRM's conflict-of-interest policy. The still-pending case involves CIRM director John Reed of the Burnham Institute, who attempted to influence CIRM staff on behalf of a $638,000 grant to his institution. Reed's action came at the suggestion of CIRM Chairman Robert Klein.

Philippis also took a close look at the audit that CIRM commissioned on its financial activities. He wrote:

"In January, Macias Gini and O’Connell completed its audit of CIRM’s finances for the year ended June 30, 2007. According to that audit, available here, CIRM’s net asset deficit rose by 46 percent, or nearly $7 million, to $22.2 million, “primarily due [to] expenses exceeding revenues.”

"And while CIRM generated nearly 13 times, or $4.55 million, above its 2006 fiscal year revenue — almost all of it through higher investment earnings — expenses dropped by $6.1 million.

"That $6.1 million figure reflects the difference between a $13.6 million cut in research grant expenses and two expenses that rose in FY ’07: Operational expenses that zoomed up 47 percent or nearly $2 million; and interest expenses on its bonds that rocketed 25-fold over the previous year ($5.5 million, vs. $225,416). CIRM cut another $2.1 million in operations costs, however, by cutting back on travel and meetings.

"Not recorded in the audit: The $1 million 'fair' value of CIRM’s roughly 20,000 square feet of office space donated by the city of San Francisco to the stem-cell agency free for 10 years. CIRM moved into that space in November 2005."

Access to the BioRegion News article is available through free registration, we are told, despite what appears to be a requirement for a paid subscription.

(Editor's note: The Philippides piece contains an error concerning the initial story on Reed's lobbying effort, stating that Reed's action was discovered by Simpson. In fact, the lobbying by Reed was first reported by the California Stem Cell Report.)

CIRM Response on Audit

Earlier this afternoon we asked Don Gibbons, chief communications officer for CIRM, if the agency had any comment on the state controller's audit(see item below). Here is his response.

"We are thrilled that the auditor found that our policies and procedures are working. The one minor issue related to specialists who call in to assist in grant review and signed conflict forms prior to the call, but not afterward, and that fix was put in place already at the April 9-11 grant review session."

New CIRM Audit and Foxes and Chickens

California's top financial officer today said the "administrative processes and expenditures" of the state's stem cell agency are "proper" and in compliance with the Prop. 71, the ballot initiative that created the agency in 2004.

The audit by the office of state Controller John Chiang made one recommendation. It involved CIRM's grants working group, where specialists failed to follow a policy requiring them to sign post-review certification forms that cover conflicts of interest, confidentiality and non-disclosure of information. CIRM said it agreed with the recommendation and has taken steps to correct the situation.

"Big deal,” said John M. Simpson, stem cell project director for Consumer Watchdog. He added,

"Under Prop. 71, none of these disclosures are open to public review. They should be."

Chiang (see photo), who is a Democrat and was elected by statewide vote, ordered the audit last year following stories about violation of conflict of interest rules by a CIRM director (first reported by the California Stem Cell Report). However, the scope of the audit was limited largely to accounting and compliance matters because that falls within the scope of the controller's office.

Simpson said in a news release that the audit ignored "fundamental flaws" at the agency.

"The problem is that Prop. 71 deliberately created an oversight board that is fraught with conflict," said Simpson.

"The board is dominated by representatives of the very institutions that will receive most of the $3 billion in research funds handed out. Controller Chiang found that CIRM is following Prop. 71’s rules, but those rules specifically put the foxes in charge of the chicken coop."

The audit did refer peripherally to the investigation by the state Fair Political Practices Commission into complaints of conflict of interest violations by CIRM Director John Reed. Chiang and Simpson asked for the FPPC probe, which is not yet complete. The controller's report said,

"The FPPC investigatory procedures may disclose additional issues, facts, and circumstances beyond the matters noted in our review, as our review was not an investigation."

CIRM President Alan Trounson, in a response to the controller's office, said that CIRM was "pleased by the many positive findings."

"It is of overriding importance to us to ensure that California have full confidence in the integrity of the processes we use to commit public funds to stem cell research."

Release of the audit came on the same day as the state Senate Appropriations Committee unanimously approved, 14-0, legislation by Sen. Sheila Kuehl, D-Santa Monica, aimed at ensuring that Californians have affordable access to CIRM-financed therapies. The measure, SB1565, would also require a study next year aimed at policy issues concerning CIRM, including its difficulties with conflicts of interest. The bill now goes to the Senate floor.

Chiang's audit will be reviewed by the Citizens Financial Accountability and Oversight Committee on July 7 in San Diego. That group was created by Prop. 71 to examine CIRM procedures.

Stem Cell Mischief and 'Research Sites'

For the first time in the brief life of the California stem cell agency, businesses based throughout the United States or elsewhere have had a chance to bid for some of the $3 billion in research funds being given out by the Golden State.

There is one catch. The firms must have established a "research site" in California by Feb. 5 of this year, which was the deadline for applications in the $25 million new cell lines program. If applicants did not have a site already in California, they had only about two months to set up one after the request for applications went out in late November.

CIRM reports that 12 businesses have applied, but provides little other information. Nor is the agency checking any time soon to see whether the business applicants, in fact, have "research sites" in California. That will come months from now, after CIRM directors approve the grants, which is scheduled for June. Following approval the CIRM staff will begin an administrative review, which in the past has taken additional months.

Perhaps we are overly suspicious, but given the tight timetable for creating a "research site," it seems that now is the time to check on the existence of these sites. Attempting to do so six months from now is problematic at best and is certainly not a good example of what might be called "due diligence." If there is a difference of opinion next summer between CIRM and an applicant about the existence of the site in February, the evidence trail could be cold and murky.

CIRM cannot tell us whether any firms headquartered outside of California have applied. Ellen Rose, a spokeswoman for CIRM, said the application does not ask for that information.

The application forms, in fact, do not even ask for a specific street address of the "research site," a term which is undefined in the CIRM documents we examined. The application asks only for the institutional mailing address of the organization for purposes of receiving the grant.

Rose said,

"Confirmation of applicant research sites in California is not something we do before accepting the application for review. This is a long technical process, which we will embark on only if the grants are recommended for funding during further administrative review."

She also said,

"The burden is always on the applicant to demonstrate eligibility. If a company can't demonstrate evidence of a California site on Feb. 5, then it is not eligible - this was the same for applicants that were new (either new to California or just new) non-profits, that have applied for grants going back to the first SEED and comprehensive grants."

Perhaps all the business applications come from well-established California firms. (The public cannot know because their names are deemed to be secret by CIRM decree.)

But it would seem to be in CIRM's own best interests to scan the applications within the next few days to sniff out any likely attempts at deception. If mischief is afoot, detecting it six months from now could be an ugly and unproductive business.

Limos, Red Flags and Perception

The California stem cell agency is excising the word "limousine" from its new travel and expenses policy after one director warned that it was a "red flag."

The action came at a meeting Monday of the Governance Subcommittee of the directors of the $3 billion research effort.

The subcommittee was reviewing a new travel policy aimed at dealing with some of the concerns of the California state auditor, who last year questioned lunches that cost $36, dinners that cost $65, pricey air travel and chauffeured limos, which the auditor said that CIRM preferred to describe as "large-sized vehicles" with hired drivers.

As prepared for the Governance Subcommittee, the new policy, which applies to directors, staff, out-of-state members of CIRM working groups and job candidates, permitted the use of limousines from airports and railroad stations.

Sherry Lansing(see photo), former head of a Hollywood film studio and chair of the Governance Subcommittee, said, "Limousines should be used only in extreme conditions because you can almost always get a cab." Claire Pomeroy, another member of the subcommittee and dean of the UC Davis medical school, said that the use of large rented cars with drivers "raises lots of red flags."

James Harrison, outside counsel to CIRM, said the policy would be revised to remove the word limousine when it comes before the full Oversight Committee next week. However, it appears that use of rental cars with drivers will be permitted under some circumstances. Robert Klein, CIRM chairman, suggested that "sedan service" be permitted when there is a necessity for speed or bad weather conditions exist.

Some subcommittee members noted that sedan service can be less expensive than cabs in some situations.

Lansing and Pomeroy are correct, however. The use of limousines at taxpayer expense is not something that sits well with the general public. Especially when the governor has just announced he will propose a budget that will hurt many groups, including AIDS patients, the poor and the elderly and slap a tax on renters, homeowners and business owners who buy property insurance.

No matter that the amounts for rental of "sedans" are relatively trivial. No matter that the money would not make even a dimple in the state budget crunch, even if the governor could lay his hands on the money, which he can't, thanks to Prop. 71. It's all about symbolism and perception and maintaining CIRM's reputation.

Limos, Meals and More at CIRM

Ten months ago, the California state auditor took the California stem cell agency to task for sloppy bookkeeping and excessive travel and meal expenses.

The auditor found fault with lunches that cost $36, dinners that cost $65, pricey air travel and chauffeured limos, which the auditor said that CIRM preferred to describe as "large-sized vehicles" with hired drivers.

CIRM moved quickly to clean up its procedures for its staff. But the problems identified by the auditor involving CIRM directors remain uncorrected. Today, however, the director's subcommittee on governance will take a crack at a new travel policy for both directors (members of the Oversight Committee) and staff.

In at least one regard, the proposed new policies appear to roll back one of the changes backed by the auditor: elimination of the use of chauffeured cars. Whether the policies meet the auditor's standards in other areas is difficult to tell, but the complex documents contain ample flexibility, which some might call loopholes.

Normal limits on per diem expenses could be waived for foreign travel in the case of "a special event or function, e.g., a national or international sports event." First class air travel could be possibly permitted in the case of "unduly long layovers" or in the case of undefined "medical needs." And the use of limos would be permitted to and from an airport or railroad station.

The proposed travel policies to be considered this afternoon were not posted until late Friday on the CIRM web site. Missing were two important documents that should have been created in formulating the new rules. One would show how the new policy meets the problems detected in the audit last year. Another would show how the proposed CIRM policy diverges from the University of California travel policy on which it is based(another issue in the audit). A possible third document would show how the new policy is changed from the existing policy and how the proposed staff and director policies diverge from each other.

The state auditor did not wait until her report was published in February of last year to tell CIRM about some of the problems she had detected. Former CIRM President Zach Hall dealt early on with many of the issues involving staff. But as for the travel policies for CIRM directors, the audit stated, "According to the institute president, institute staff did not presume to suggest a policy for the committee." Dealing with those is the responsibility of Chairman Robert Klein.

In terms of raw dollars, the amounts involved in CIRM travel and expenses are piddling compared to its whopping multimillion dollar grants, probably not more than a few hundred thousand dollars although details cannot be found in the latest CIRM budget documents. But talk of chauffeured limos and $65 dinners does not sit well with the public or the media. Few persons can understand what $1 billion means. It is much easier for your average Californian, who is paying $4 a gallon for gas in some locations, to grasp a vision of limos and luxury lunches – an image that does not serve CIRM well.

(Editor's note: Some of the rules for expenses are linked to a "business meeting expenditure policy" that is yet to be approved or posted on the CIRM web site.)

Financial Scrutiny of CIRM Coming Up Next Week

The Citizens Financial Accountability Oversight Committee may be one of the more obscure entities in state government. It has only been around for three years. It has only met once. And it already has had a 66.6 per cent turnover in membership.

The group will meet again next Tuesday in San Francisco to consider the doings of the $3 billion California stem cell agency. And it will have plenty to chew on – everything from intellectual property to a 101-page analysis of CIRM by the Bureau of State Audits.

But few surprises are expected. This is a friendly group, created by Proposition 71 and chaired by state Controller John Chiang(see photo), who once brought one of his children to a meeting of the CIRM Oversight Committee in Los Angeles. However, the committee is charged with reviewing CIRM's financial practices and performance, which gives it plenty of leeway to make constructive criticism. Perhaps even recommending public disclosure of the economic interests of grant reviewers who conduct their activities behind closed doors, or at least seeking an opinion from the state attorney general on disclosure, as suggested by the state auditor.

Or the committee could recommend disclosure of the names of the universities and nonprofit research institutions that are seeking $227 million in taxpayer funds to build stem cell labs – names which CIRM has refused to reveal on the grounds that they might be embarrassed.

The group apparently has two new members, Gurbinder Sadana and Loren Lipson. Sadana is a private physician in Pomona, Ca., and serves on the board of directors of the Pomona Valley Hospital. Lipson was recently appointed, and no information was available concerning him/her on the state controller's web site.

One of the new appointees replaces John Hein, who was a lobbyist for the California Teachers Association. The Foundation for Taxpayer and Consumer Rights challenged his appointment as illegal because he did not meet the legal qualifications. Also off the board is Richard Siegal, who runs his own oil exploration company and has given widely to health care issues. No reasons for their departure were available on the controller's web site.

Chiang is also new to the board. The other members of the committee are Daniel Brunner, a retired attorney from the Sacramento area who co-founded Affordable Health Care Concepts in Sacramento; Jim Lott, executive vice president of the Hospital Association of Southern California, and Myrtle Potter, a former vice president of Genentech who now is involved in commercial and residential real estate development. Potter was named as woman of the year in 2006 by the American Diabetes Association and serves on the board of directors of Amazon.com.

One of items on the agenda is a proposal for a conflict of interest code, which was not available on the controller's web site at the time of this writing.

You can find the agenda and other information on the committee here.

CIRM Says No to Auditor's Conflicts Concerns

Elaine Howle, the California state auditor, knows a great deal about the mischief that goes on in state government. And make no mistake about it, mischief does occur even when the multibillion dollar battle ground is in public and the economic interests are on full display.

She also knows that the mischief can grow even greater when the doors are closed and the financial interests of the major players are hidden from the public, such as in the case of grants awarded by California's $3 billion stem cell agency.

So Howle (photo above) recommended last spring that the California stem cell agency, with its $3 billion research effort, do more to ensure that its conflict of interest code is followed. Her suggestion was rather modest considering the stakes: CIRM should ask the state attorney general for an opinion about whether the men and women who make the basic decisions on hundreds of millions in dollars in grants should be required to publicly disclose their economic interests.

CIRM's answer to the state auditor came last month: No.

"It is not appropriate," said the agency in letter to Howle. The letter came only 10 days before one institution withdrew its request for $2.6 million, a pitch that was approved by grant reviewers in secret last March without turning up the fact that the applicant was tied to an international scientific flap.

Richard Murphy, interim president of CIRM, wrote to the state auditor,

"We have given careful consideration to your recommendation and have decided it is not appropriate to implement at this time. In almost three years of operation and approval of four rounds of grants, the recommendations of the CIRM working groups have never been routinely and/or regularly adopted by the ICOC. Until the time that such a pattern is detected, the question you suggest we raise with the attorney general is entirely hypothetical, and is therefore not appropriate for submission. We will, however, continue to monitor approvals for such a pattern and will reconsider our decision if one emerges."

Murphy has some interesting lines of reasoning here, ones that clearly had the influence of a skillful attorney.

One part of his response refers to "routine and regular" actions. Another says the whole matter is hypothetical, implying that hypothetical possibilities are not worthy of public action. Let's examine CIRM's contentions.

First, should hypothetical situations to be ignored by government agencies? The possibility of contracting small pox or polio is hypothetical. Does that mean that children should not receive vaccinations against those diseases? Or that the government should not require them to be vaccinated in certain situations? The possibility of a terrorist boarding a plane with a bomb is hypothetical. Does that mean inspections of passengers boarding aircraft should cease?

The point about PUBLIC disclosure of the economic interests of grant reviewers is to prevent serious problems. A scandal involving conflicts-of-interests among persons who make critical judgments on the requests for hundreds of millions of dollars in taxpayer funds could be crippling to the stem cell agency. It is in the agency's best interests to inoculate itself against that possibility. It is most certainly in the public's best interest.

As for the routine ratification of reviewer recommendations, the Oversight Committee, which has ultimate legal authority on grant approval, has modified the reviewers' recommendations from time to time. We are sure that CIRM's able legal staff has counted the occasions and is prepared to make the case that the Oversight Committee does not routinely give grants a rubber stamp.

However, from seeing the board in action and reviewing transcripts, we come to a different conclusion, although we have not yet counted and assessed each individual vote. Reviewers are making de facto decisions. Most grants are routinely approved with little discussion by the Oversight Committee. Only a relative handful have been changed by that group.

Asking for a formal opinion from the attorney general is a serious matter. Such opinions have the force of law, for most purposes. CIRM would not want to seek such an opinion if it were uncertain of a favorable result. It is also fair to say that unless something changes, CIRM is not likely to ever detect a pattern of "routine and regular" approval of reviewer recommendations. To do so would open the agency to other legal perils, such as lawsuits alleging that the Oversight Committee is failing to perform its duties as required by law.

(The CIRM response on this matter is part of a document filed as part of the six-month response to the entire state audit. The response is not available on the Internet. If you would like a copy, please send an email to djensen@californiastemcellreport.com.)

Stem Cell Snippets: Dirty Laundry and Openness

Humiliation and Secrecy – Scientists are accustomed to publicly humiliating each other, comments Wired blogger Kristen Philipkoski on CIRM Chairman Robert Klein's defense of CIRM's secrecy policy on the economic interests of grant reviewers. Dale Carlson, chief communications officer for CIRM, also defends the public secrecy in an op-ed piece in The Sacramento Bee. The San Jose Mercury News editorializes against it: "The public has a right to know who is applying, what research they want to do and who failed to receive grants. It also should know when scientists reviewing those grants have a conflict of interest. Opening up those two crucial aspects of the state's stem-cell program will help build confidence that taxpayers' $3 billion investment is in good hands."

Audits, Editorials and Dirty Laundry – Patient advocate Don Reed says in a March 1 item that the State Auditor did not find any real "dirty laundry" in her report on CIRM. The San Jose Mercury News editorialized that the institute should revisit its "ongoing transparency issues." The newspaper also said, "If questions over the use of chauffeured rental vehicles are going to receive this much attention across the state, imagine how the focus will sharpen when the institute starts spending $300 million a year and choosing which areas of research deserve priority." The San Francisco Chronicle editorialized that the audit has "the power to keep the institute on track to meet strategic goals and avoid conflicts of interest."

One Million – For the latest on the doings of the advocacy group headed by CIRM Chairman Robert Klein, check out its Web site. Americans for Stem Cell Therapies and Cures is pushing a nationwide email campaign on Congressional stem cell legislation. The goal is to generate one million personal stories, print them out and deliver to Washington, D.C.

Pachter Joining CIRM, Another Audit Released

The California stem cell agency has named its first general counsel and released its own – nonperformance – audit following the report earlier this week by the State Auditor that picked apart CIRM workings in details that dug into $36 lunches.

The top legal spot at the agency went to Tamar Pachter, who was the lead attorney in the agency's so-far successful defense against challenges to its existence. Pachter, who will join CIRM March 19, served as a California deputy attorney general, where she worked in the areas of antitrust, bankruptcy and energy regulation for the past four years. A graduate cum laude from Fordham University of Law, she was selected from nearly 100 applicants. Her annual salary will be $160,000. More details on her background can be found in the press release at the www.cirm.ca.gov.

CIRM has a $558,000 contract for this fiscal year with the San Leandro law firm of Remcho, Johansen & Purcell. It has already paid Remcho $539,600 since January 2005.

The audit released by CIRM was commissioned under its $100,000, two-year contract with Macias Gini & O'Connell of Sacramento. It is typical of the sort of audits that are commonplace in the corporate world and covers less ground than the performance audit by the state auditor.

CIRM said,

"In a separate report, the auditor identified several opportunities where the CIRM could strengthen internal controls and operating efficiency. Some are related to practices of the State Controller’s Office, which acts as the Institute’s bookkeeper; others are wholly within the province of the CIRM. Per the auditor’s recommendation, for example, members of the CIRM governing board are now required to sign annual statements acknowledging review and receipt of the Institute’s conflict of interest policies. All the Macias Gini & O'Connell recommendations have been accepted by CIRM management."

You can find the report at the CIRM web site: www.cirm.ca.gov. Currently we are unable to access it directly but hope to bring you more on it later.

CIRM's Conflicts: Beware the WARF Syndrome

The California State Auditor has freshened the debate over public disclosure of the economic interests of the men and women who review the applications of scientists and others seeking hundreds of millions of dollars in grants from the state of California.

The auditor's report Tuesday recommended that the California stem cell agency seek an attorney general's opinion on whether its policy is appropriate. CIRM does not require the grant reviewers to disclose publicly their economic and other interests. But it does require them to disclose confidentially to CIRM.

The position of the California Stem Cell Report is that the reviewers make de facto decisions on the grants and that they should disclose their economic interests. Others advocate disclosure as well, including The Sacramento Bee and the San Jose Mercury News.

We are presenting here the text of what the auditor had to say and CIRM's response along with a related paragraph from the Court of Appeal Monday. CIRM has not yet decided whether to seek an AG's opinion. We should note that Jerry Brown, the attorney general, decades ago sponsored the Political Reform Act mentioned in the discussion below, an initiative he touted as a much-needed good government measure.

We have written much on this subject, but would like to add a few additional comments at this point. CIRM is in danger of falling prey to the WARF Syndrome. We refer to the Wisconsin Alumni Research Foundation, which last year told California that it had to cough up royalties for its state-financed stem cell research. The position triggered a flap that only ended with WARF declaring that it would not require the royalties after all. WARF, a nonprofit organization with a longstanding record of supporting science, finally did what was right, rather than focusing narrowly on self-interest and protecting its patents. In this case of reviewer disclosure, CIRM is narrowly focused as well. Various interests obviously have to be balanced. But CIRM has tilted too far in protecting its reviewers from public scrutiny, justifying its position on the untested, hoary premise that the secrecy is the only way to generate "good science." This is a case where CIRM should let the sun shine in. Billions are literally at stake along with public trust in the agency. Public disclosure is the right position. It not only reflects the public's best interests and the best interests of good government, but it helps to protect CIRM itself from the possibility of a truly nasty scandal.
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Here is what the auditor had to say:

Although the institute developed a Conflict of-Interest code and policies, improvements are needed to ensure that they are followed

With certain exceptions, committee members and institute employees are subject to the requirements of the Political Reform Act of 1974 (Political Reform Act). The purpose of the Political Reform Act, in part, is to ensure that public officials perform their duties impartially, free from bias resulting from their own financial interests or the financial interests of those supporting them. In response, the committee adopted a conflictof-interest code—a set of rules intended to identify and prevent conflicts of interest that institute employees and committee members might have with entities with financial interests in the stem cell research program, as required by the Political Reform Act and state regulations pertaining to the Fair Political Practices Commission (FPPC).

To supplement the code, the committee also adopted policies designed to ensure that committee members and institute employees avoid conflicts of interest, and that the public views its conduct as open, fair, and free from bias. In addition, the committee adopted conflict-of-interest policies for the working groups that advise and assist it in establishing policies and standards, as well as evaluating grant applications. However, the FPPC has raised questions about the applicability of the Political Reform Act to the institute’s working group members, and improvements were needed in the committee’s conflictof-interest policies, as well as its procedures, to ensure that the policies are followed.

The FPPC Has Questioned the Exclusion of the Working Groups From the Institute’s Conflict-of-Interest Code

The institute formulated and the committee adopted a conflict-of-interest code. With certain exceptions, the institute’s act requires that the committee and the institute comply with the Political Reform Act, which includes the requirement to prepare a conflict-of-interest code. The Political Reform Act also specifies the required contents of such a code. The key requirements are presented in the text box.(See item at the end of this statement.) To provide information on employees designated as decision makers that may affect financial interests and the types of financial interests those designated employees must disclose, government agencies that do not wish to draft their own conflict-of-interest codes may adopt a model code provided by state regulations. This model code may be modified to designate the employees who must disclose financial interests and the extent to which they make disclosures. The committee adopted a modified model code.

The Political Reform Act requires that the institute submit its conflict-of-interest code to the FPPC for review and approval. The FPPC must review the code to determine if it provides reasonable assurance that all foreseeable conflicts of interest will be disclosed or prevented, all affected persons have clear and specific statements of their duties under the code, and the code differentiates between designated employees with different powers and responsibilities. The institute submitted its code to the FPPC in July 2005, and after an exchange of correspondence between the FPPC and the institute, the FPPC approved the institute’s code in May 2006. Subsequent to FPPC approval, the institute submitted the conflict-of-interest code to the Office of Administrative Law for its review and inclusion in state regulations. The Office of Administrative Law approved the institute’s code in September 2006.

However, the FPPC has raised questions about the exclusion of the working groups from the institute’s conflict-of-interest code. The FPPC believes that members of working groups, who perform duties such as advising the committee on standards and policy or evaluating grant applications and making award recommendations to the committee, may need to be included in the conflict-of-interest code. Specifically, the FPPC believes that, under state regulations, working group members may act as decision makers if they make substantive recommendations that are, over an extended period, regularly approved without significant amendment or modification by the committee. Thus, as decision makers, working group members would need to be subject to the conflict-of-interest code. This would mean that working groups would be subject not only to the financial disclosure requirements of the Political Reform Act but also to the prohibition against a member participating in a government decision in which that member has a disqualifying financial interest and may be subject to the penalties that may be imposed on individuals who violate that act.

In response to the FPPC, the institute stated that members of the working groups are not subject to the pertinent requirements because the language in the institute’s act expressly exempts those members from the Political Reform Act, even when the recommendations of a working group are approved over an extended period. Therefore, according to the institute, it is not necessary to engage in ongoing analysis to determine whether, over time, the committee routinely approves the working groups’ recommendations. The FPPC responded that the language of the act “is no basis for exempting working group members from the [Political Reform Act’s] most fundamental disclosure rules if it becomes apparent that the working group’s role in governmental decisions is more than purely advisory.” It concluded that this issue may need to be revisited in the future.

The institute requires working group members to make financial disclosures (as discussed later). However, there are some differences between the Political Reform Act and the institute’s requirements for working group members that would apply if the FFPC’s view were correct. One key difference is that, under the Political Reform Act, the financial disclosures must be made public; the institute’s requirements keep the disclosures private. Also, an individual who is subject to the Political Reform Act may be subject to certain penalties if the individual violates the requirements of that act. As of December 2006, it was too early to assess whether the working groups will make recommendations on grant funding or other substantive recommendations that the committee will accept without significant amendment or modification that might result in a challenge to the institute’s interpretation.

The committee chair commented that the Superior Court of the County of Alameda, when it ruled in May 2006 on the legal challenge to the constitutionality of the institute’s act, considered the question of whether the grants review working group was a decision-making body. The court, based on the evidence presented at trial, including testimony of committee members and the experiences at the one grant award meeting that had been held, concluded that the committee is the “ultimate decision-making body” and not the working group. However, this ruling is not binding as the case is pending appeal.

Our legal counsel advised that, although a court will give deference to the institute’s interpretation of the act, ultimately only a court of law can make the determination of which interpretation is correct. Our legal counsel also noted that other provisions governing conflicts of interest that the act specifically references, and that the institute believes the act also exempts working groups from, may be implicated if the FFPC’s interpretation is correct. For example, California Government Code, Section 1090, prohibits a public official from being financially interested in any contract made in his or her official capacity. Various judicial decisions have held that Section 1090 also applies to those who advise the members of the governing body. The attorney general has opined that an adviser who has a financial interest in a contract or grant must abstain from giving any advice on that matter to avoid a conflict of interest. A violation of Section 1090 may result in a felony conviction and void a contract.

In view of the seriousness of a violation of conflict-of-interest laws and the concerns raised by the FPPC, we believe that it would benefit the institute to seek a formal opinion from the attorney general regarding whether the exemptions created for working groups from conflict-of-interest laws are intended to exempt them from the conflict-of-interest provisions that apply if the recommendations of an advisory body are adopted routinely and regularly by the decision-making body to whom they are made.

Conflict-of-Interest Code as Specified by the Political Reform Act

• Agency positions, known as designated employees, that participate in making decisions that might materially affect their financial interests.

• The types of investments, business positions,real property interests, or sources of income that might be materially affected by decisions made by designated employees. These are considered reportable financial interests.

• Requirements that designated employees periodically file Statements of Economic Interest disclosing their reportable financial interests.

• Specific circumstances that would require designated employees to disqualify themselves from making decisions or influencing the making of decisions. Disqualification is required when a designated employee has a financial interest that could be affected materially by the decision.

The Institute Has Established Processes to Disclose Financial Interests

Committee members and institute employees are requiredto disclose their financial interests, such as investments and incomes, that meet thresholds identified by the Political Reform Act. These financial interests are reported on Statements of Economic Interest, which are public documents. The Political Reform Act sets timelines for public officials to file these forms. Committee members are required to file within 30 days of assuming office, annually thereafter, and within 30 days of leaving office. All committee members and their alternates filed their Statements of Economic Interest from 2004 to 2006. We found 10 occurrences of late filings by members and alternates during 2004 and 2005. The number of late filings decreased to four in 2006.

Institute employees were not required to file their initial Statements of Economic Interest until 30 days after the conflict-of-interest code became effective. However, to promote transparency, the institute asked its employees to file their statements before the required date. After the conflict-of-interest code became effective, institute employees filed their statements again, within the required time frame.

Although the institute maintains that working group members are not subject to the Political Reform Act, the institute’s act requires the committee to adopt conflict-of-interest rules for noncommittee members of the working groups, such as scientists and other experts. These rules must be based on standards applicable to members of scientific review committees of the NIH. NIH standards require reviewers to alert officials to any possible conflict of interest and, before and after every meeting, identify any application on which they have a conflict of interest and certify that they will not be, and have not been, involved in the review of any application in which their participation constituted a conflict of interest.

In response to the act’s requirements, the committee has adopted conflict-of-interest policies modeled after the NIH for its two working groups that review grants. The standards used for the rules of the third working group are described in the next section. In addition, although not required by NIH standards, the noncommittee members of the three working groups are required to file confidential financial disclosure statements signed under penalty of perjury. The institute considers these conflict-of interest policies to be so significant to the public interest that it has submitted them to the Office of Administrative Law to have them included in the institute’s regulations.

During the public comment portion of this rulemaking process, members of the public expressed concern that the act does not preclude the institute from publicly disclosing the working group members’ confidential financial disclosure statements and urged the committee to require public disclosure. The committee disagreed with the suggestion. According to the institute’s president, making the financial disclosure statements public would deter scientists from joining the working groups because grant reviewers feel that a public disclosure is an invasion of their privacy. Further, the institute’s president stated that grant reviewers consider the confidential disclosure statements to be sufficient because they sign them under penalty of perjury, and they believe their work is an act of “good will” because it helps their competitors get funded and because their per diem rate is low.

The financial disclosure statements for working group members require information similar to what is required from the committee members and institute employees, such as sources of income of $5,000 or more from biotechnology and pharmaceutical companies, as well as California-based academic or nonprofit institutions. All noncommittee members of the Scientific and Medical Accountability Standards Working Group (standards working group) and the Scientific and Medical Facilities Working Group (facilities working group) who participated in committee meetings, as well as all the members of the grants review working group who reviewed training grant applications, filed confidential financial disclosure statements, as required.

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Here is what CIRM had to say concerning the recommendation that it seek an attorney general's opinion on its disclosure policies for grant reviewers:


CIRM is committed to ensuring that the evaluation of grant applications is free from both real and apparent conflicts of interests. For this reason, the ICOC has adopted conflict of interest policies for members of the working groups that go beyond the requirements of the Political Reform Act (“PRA”). As the audit notes, however, CIRM disagrees with the FPPC’s opinion that members of CIRM’s working groups might be subject to the PRA at some point in the future.

Although we believe that Proposition 71 clearly exempts the working groups from the Political Reform Act, we understand the merits of seeking an opinion from the office of the Attorney General and we will seriously consider the recommendation to do so. But for the record, it is important to consider what is not in dispute.

First, even under the FPPC’s interpretation of the law, the members of CIRM’s working groups are not currently subject to the PRA’s economic disclosure and disqualification requirements. As the Alameda County Superior Court found, the ICOC made significant changes to the Grants Working Group’s recommendations regarding the training grants. The ICOC, the Court concluded, is the ultimate decision-making body, not the Grants Working Group. Second, as required by Proposition 71, the members of CIRM’s working groups are currently bound by conflict of interest rules adopted by the ICOC. These rules, which are modeled on the National Institutes of Health and National Academies of Science’s conflict provisions, require disclosure and disqualification, but unlike the Political Reform Act, they also extend to “personal” and “professional” conflicts of interest. Because the FPPC’s opinion may lead to the erroneous belief that working group members are not currently subject to conflict of interest rules, or that the PRA’s provisions are stronger than those adopted by the ICOC, we believe a brief discussion of the law and the ICOC’s policies and regulations is warranted.

Health and Safety Code section 125290.50, enacted by Proposition 71, requires the ICOC to adopt conflict of interest rules for the working groups based on standards applicable to members of scientific review committees of the National Institutes of Health (“NIH”) and to appoint an ethics officer from among the staff of the institute. Importantly, it also exempts members of the working groups from the PRA and other Government Code provisions:
“(3) Because the working groups are purely advisory and have no final decisionmaking authority, members of the working groups shall not be considered public officials, employees, or consultants for purposes of the Political Reform Act (Title 9 (commencing with Section 81000) of the Government Code), Sections 1090 and 19990 of the Government Code, and Sections 10516 and 10517 of the Public Contract Code.”

These provisions establish a regime by which the members of the working groups are covered by conflict of interest rules based on the NIH standards as opposed to the PRA. This makes sense for two reasons: First, the working groups are closest to the peer review committees of the National Institute for Health; no similar body exists under state law. Thus, it is logical to look to federal conflict of interest policies as the model for CIRM’s working groups. Second, the PRA would impose narrower conflict of interest rules on the working groups and it would impose such rules only after certain requirements are satisfied, i.e., if a working group makes substantive recommendations that are, and over an extended period of time have been, regularly approved without significant amendment or modification by the ICOC (FPPC Regulation 18701). If these conditions were never met, the working groups would not be subject to PRA conflict of interest rules. Furthermore, because FPPC Regulation 18701 requires an analysis of past conduct, it necessarily draws a line that is visible only after it is crossed.

Section 125290.50 avoids this uncertainty by declaring that the working groups are advisory, exempting them from the PRA, and by imposing separate and more extensive conflict of interest rules on working group members. In so doing, this section ensures that conflict of interest disclosure and disqualification rules are in place from the outset of working groups’ work.

As stated in the audit report, the success of the CIRM research program and its ability to maintain the confidence of the people of California depends critically upon the agency’s ability to fund the highest quality research proposals, chosen without bias. Strong CIRM conflict of interest policies are therefore essential. Thus, the ICOC adopted conflict of interest policies in 2005 to apply to each working group. These rules were inspired by policies of the National Institutes of Health, as required by Health and Safety Code section 125290.50, subdivision (e)(1). The ICOC did not stop there - the ICOC has taken the unprecedented step of codifying these policies in regulations. Unlike the Political Reform Act, these regulations encompass not only financial sources of conflicts but also address professional and personal sources. Thus, the working groups, under Proposition 71 and the policies and regulations adopted by the ICOC, are subject to more stringent rules than nonadvisory public officials under the Political Reform Act.

Moreover, the members of the two grants working groups, research and facilities, undergo a pre and post-award review of their required disclosures and the potential sources of conflict, and attest under penalty of perjury that they have not participated in review of any application for which they might have a conflict of interest. This is not required of any public official under the PRA. CIRM will maintain appropriate records of the disclosures and participation of working group members to make them available for audit AND will report to the Legislature any violations of the rules AND describe corrective actions taken to prevent future occurrences. Neither the report nor corrective action is required under the Political Reform Act.

These regulations strike the proper balance between the privacy of volunteer advisory body members and the public’s desire for information about the individuals. The review by staff and independent auditors, and the records that substantiate those reviews, ensure that the utmost vigilance will be maintained to ensure the integrity of the working groups’ efforts. As a result, the Institute has in place conflict of interest regulations and policies that are stronger than either the PRA or NIH standards.
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Here is what the Court of Appeals had to say regarding decision-making by grant reviewers:

The Council (editor's note: meaning CIRM opponents) contends that if the more general statutory and common law conflict of interest provisions are not applicable to the ICOC members, they should nonetheless apply to members of the grants working group. This argument is based on the incorrect assertion that the grants working group is a decisionmaking rather than an advisory body. However, section 125290.50, subdivision (e)(3) provides that '[b]ecause the working groups are purely advisory and have no final decisionmaking authority, members of the working groups shall not be considered public officials, employees or consultants for purposes of the Political Reform Act' and other conflict of interest statutes.

State Audit: CIRM Likely to Find the Devil in the Details

Dispassionate blandness dominated the report by the California State Auditor on the state's $3 billion stem cell agency, but the details are certain to provide ammunition for the full range of its critics.

The auditors picked apart the two-year-old agency and many of its procedures. Its overall findings seemed reasonable enough that CIRM itself pronounced the report "accurate," "fair" and "valuable." Certainly many of the auditor's findings were to be expected involving the fledgling agency that, in many ways, initially was more like a semi-floundering business startup than a government department.

But the details from the report are likely to be aired with vigor during upcoming public hearings on the billion dollar issues involving who shares the wealth – if any – from state-funded stem cell discoveries – not to mention affordable access to stem cell cures and therapies.

The auditor also raised to a new level long-standing questions – including those by this blog -- about conflicts of interests involving the persons who review tens of millions of dollars in CIRM grant applications.

The auditor recommended that CIRM seek an opinion from the attorney general on its position that grant reviewers do not need to make a public disclosure on their economic interests. The auditor said:

"In view of the seriousness of a violation of conflict-of-interest laws and the concerns raised by the FPPC, we believe that it would benefit the institute to seek a formal opinion from the attorney general regarding whether the exemptions created for working groups from conflict-of-interest laws are intended to exempt them from the conflict-of-interest provisions that apply if the recommendations of an advisory body are adopted routinely and regularly by the decision-making body to whom they are made."

The auditor referred to previously undisclosed exchanges between the Fair Political Practices Commission, which is charged with overseeing the state's economic disclosure laws, and CIRM. The FPPC, the auditor said, believes working group members "may act as decision makers if they make substantive recommendations that are, over an extended period, regularly approved without significant amendment or modification by the (CIRM Oversight) committee." That means that reviewers would have to make a public disclosure of their economic interests.

CIRM says it is consulting with its private attorneys to determine whether to seek an opinion from Attorney General Jerry Brown. (We will have more on this subject in a separate item later today.)

Some of the other details likely to be bandied about publicly involve already-being-corrected contracting procedures that seemed a little fast and loose – our words, not the auditors – along with chauffeured vehicles, lunches that cost $36, dinners that cost $65 and pricey air travel.

But the big money issues – perhaps running into billions of dollars - surround formulation of CIRM's intellectual property rules -- sharing the profits from stem cell therapies and cures, as well providing affordable access to those therapies and cures.

The subject is known as IP. CIRM has spent many months wrestling with the issue, trying to come up with solid, well-supported policies. Its IP meetings have been sparsely attended even by institutions and businesses that would be deeply affected by CIRM's decisions. The public has been invisible along with the media, for the most part. Often times because of its unique nature, CIRM ventured into an IP wilderness where no trail guides existed.

Auditors complained of the lack of documentation for CIRM's existing policies. For example, the report said, "The vice chair and his deputy could not provide adequate documentation to demonstrate why the 25 percent (royalty) figure is an appropriate payment from nonprofit organizations. As such, they also could not demonstrate that 17 percent is an appropriate payment from for-profit grantees."

At another point, the auditor remarked on the fraility of notes in scores of interviews conducted by CIRM staff involving IP, saying, "Most of the information in the notes consisted of stand-alone sentences and references with very little or no context."

And there was more. This is what auditors do. They pick apart material that was often gathered not knowing that it would be subject to such exquisite scrutiny. Newspaper reporters sometimes find themselves in a similar situation involving their notes and stories when litigation comes up, as the news gatherers testifying in the Libby trial in Washington, D.C., recently learned.

Nonetheless, it will all be fodder as hearings begin later this year on IP legislation (SB771)by Sen. Sheila Kuehl, D-Santa Monica, chair of the Senate Health Committee. Her position is that CIRM has not done enough to ensure a return to the state and to provide affordable access. The auditor's report will fit neatly into her arguments.

From CIRM's perspective, the auditor's report could have been worse, and it could have been better. CIRM's formal response embodied in the report was tactful and appropriate. The audit offers a road map to improvements, many of which CIRM already knew needed to be made. But an outside voice can provide the sharp prod to ensure that they are accomplished.

State Auditor Releases CIRM Report

The California State Auditor this morning released its report on the California stem cell agency. Here is its summary of the highlights. We will have more on this later today. The full report can be found here.

"The institute identified long-term research priorities and considered the industry's best practices to create its strategic plan, but it has yet to implement a process to assess annual progress toward attaining its strategic goals.

"A task force formulated draft policies for revenue sharing through a public deliberative process but, because of a lack of documentation, we could not independently evaluate any analyses of the information on which the task force members based their revenue-sharing policies.

"Although it has a grants administration policy for academic and nonprofit institutions, the institute is still developing a for-profit policy and is still implementing a monitoring process to ensure that grantees comply with the terms of their grants.

"The institute's recent policy revisions addressed our contracting concerns, but not all of our travel reimbursement concerns.

"The salary survey conducted by the institute and the compilation of the salary data collected contained enough errors, omissions, and inconsistencies that the institute cannot ensure that the salaries for certain positions comply with the requirements of the law."

Performance Audit of CIRM Expected This Week

The spirit of Deborah Ortiz will be with the California stem cell agency this week when the California state auditor unveils its performance audit of the $3 billion enterprise.

It was Ortiz, former chair of the State Senate Health Committee, who sought the audit last year before she was forced out of office because of term limits.

The audit was intense. At times, four auditors over a period of four months prowled through the agency. That amounted to one auditor for every four CIRM employees, a ratio that probably was not surpassed in even such celebrated cases as Enron or Worldcom.

CIRM certainly does not remotely resemble either of those two infamous operations, but the state auditor is likely to come up with some critical findings. Such is almost invariably the case in its work, and no agency is perfect. In fact, CIRM has already made changes in travel and contracting policies that reflect issues that auditors identified. But critics of the agency are likely to find some grist for their mills.

The audit could be released as early as Tuesday.