THE loss of $215 million from a Bermuda-registered hedge fund by fired Bermuda pension fund manager Mark Lay's MDL Capital has led to "pay-to-play" charges being levelled at the law firm chosen by the state of Ohio to pursue the lawsuit against him.

In the wake of revelations that MDL's Bermuda-based ADF Fund had lost almost all of the state Bureau of Workers' Compensation's (BWC) investment in the hedge fund, Ohio Republican Attorney General Jim Petro brought charges of fraud against MDL.

Now Democratic politicians in Ohio are charging Mr. Petro with hiring a law firm which had made campaign contributions to him to act against MDL on behalf of the state.

Mr. Lay's MDL Capital Management managed Bermuda pension funds for four years through year-end 2004, but was fired for poor performance early this year.

Bermuda's pension fund consultant Tina Poitevien, who was responsible for introducing MDL to Bermuda in 2000, wrote a confidential memo to the BWC board last September warning of MDL's sub-standard performance, but it has never been made clear whether she gave a similar warning to Bermuda's pension fund committee.

Mr. Lay is a friend of Minister of Transport and Tourism Dr. Ewart Brown, who attended the opening of Mr. Lay's offices in Pittsburgh.

The Mid-Ocean News has reported that Ms Poitevien and Dr. Brown were guilty of involvement in "pay-to-play" activities, in that she organised a lunch in Washington, DC whose invitees, Bermuda pension fund managers and stockbrokers, were asked to give cheques in the amount of $2,500 to Dr. Brown.

The Toledo Blade reported last week that two Democratic members "brought pay-to-play charges to the state controlling board and aimed them squarely at Mr. Petro". They questioned "awarding $19 million on outside legal work to firms that had contributed $803,000 to Mr. Petro since 1998".

MUCH of the legal work is for routine collections on behalf of state agencies, "but money for other contracts also was approved to pay the legal fees caused by fallout from an investment scandal at the Ohio BWC".

Called "special counsel" work, the legal contracts awarded each fiscal year by Mr. Petro have been attacked by Democrats as "part of a pay-to-play system highlighted this year by the bureau's recent investment scandal", according to the Blade.

"Ironically, money paid through the special counsel system is helping pay legal bills from the scandal's fallout, including $375,000 for the Bailey Cavalieri law firm to help the state sue MDL Capital, the Pittsburgh-based firm that lost $215 million in bureau money on a Bermuda hedge fund."

State senator Ray Miller pointed out that the special counsel firm of Schottenstein, Zox and Dunn, which had been "in charge of reviewing and vetting bureau investments, had not informed the attorney-general's office of the MDL loss. But in yesterday's $19 million request, the firm received contracts for other state work totalling $302,000."

This week, the Blade reported that complaints by Democrats that Attorney-General Petro, who is running for Governor, would benefit from an MDL trial date expected in 2007.

"Ohio will have a new governor and likely a different attorney-general before the state resolves its lawsuit against MDL Capital Management. Lawyers for MDL and the BWC expect the trial to begin in July 2007, some eight months after the 2006 election, according to last week's filing in US District Court."

"Almost three months ago, Mr. Petro sued MDL and executives at (Bermuda-based) Olympia Capital International, the hedge fund's administrator. Using bureau money, MDL sold short 30-year US Treasury Bonds, figuring that the value of the bonds would drop as interest rates increased. The plan backfired, wiping out the majority of the bureau's $225 million investment by September, 2004. Bureau officials hid the scope of these losses from the public for nine months."

Mr. Petro, who is running for Governor against two Republicans, the state Auditor and the Secretary of State, and two Democrats, a US congressman and the Mayor of Columbus, dismissed all of the attacks as politically motivated, claiming that Democrats view him as the "most challenging" candidate they will face in 2006. With more than $3 million on hand, his campaign finances lead his rivals' cash reserves by a substantial margin.