Montana Attorney General Austin Knudsen has filed a long-threatened lawsuit against the National Association of Attorneys General, saying the Washington organization failed to comply with Montana law on how to report and invest state money.
The lawsuit seeks a court order declaring NAAG is subject to the accountability requirements of the Montana Constitution and other state laws. The private association of attorneys general has amassed more than $100 million as its share of billions of dollars in multistate settlements with corporations. That growing war chest has drawn criticism from Republican AGs who say NAAG is engaging in a form of litigation finance by lending money to states to sue corporations and then making a return on that investment by collecting money for itself in settlements.
Knudsen threatened NAAG with a lawsuit in February, saying he would sue NAAG if it didn’t return Montana’s share of settlement money within 90 days.
Much of NAAG’s financial activities are shielded from public view. The Internal Revenue Service classified NAAG as “an instrumentality of the states” in a 1985 letter granting the organization tax-exempt status. But unlike most other nonprofits, NAAG doesn’t have to file annual financial reports with the IRS.
It has reported more than $100 million in restricted accounts funded by settlements negotiated by its member AGs. The Financial Services Fund and VW Settlement Fund stem from nationwide settlements, including $20 million VW gave to NAAG for “consumer protection oversight, training and enforcement.” NAAG-appointed committee members oversee the funds, but the Montana AG said financial details are unknown other than they include a roughly 20% allocation to foreign securities.
Montana law has strict rules governing how state money can be invested, AG Knudsen said in the lawsuit, and government departments can’t manage money themselves without permission of the legislature. All money managers must have offices in the state and are overseen by a state investment committee, the AG said.
It’s unclear whether NAAG allows returns to grow within the funds or distributes them to the parent organization, Montana said. What is known is NAAG extends litigation financing to the states and then collects a share of the proceeds when cases settle. NAAG extended $7 million in financing toward a multistate lawsuit against McKinsey & Co. over its opioid marketing activities and received $15 million from the settlement, for example.
“Returns from NAAG’s litigation finance model have far exceeded returns from traditional investments,” Montana said. In 2021, assets in its settlement-fueled restricted accounts grew 19% to $158 million.
As a nonprofit professional association of law enforcement officials, NAAG occupies an ill-defined space between government and private organizations. It began collecting a share of the money its members obtained in legal settlements in the late 1980s when it set up a “milk fund” to finance antitrust investigations after settling a case with milk producers in New York.
Since then NAAG’s balance sheet has expanded dramatically, including more than $100 million from the tobacco settlement, $11 million from VW and $15 million of a $573 million settlement of opioid clams against McKinsey.
Last year, a dozen state AGs called upon NAAG to return the money to the individual states, since it represents settlement dollars that belong to their respective state treasuries.
Former Arizona AG Mark Brnovich withdrew his state from NAAG in 2022, saying his office was focused on getting “restitution back to consumers.”