Attorney General Lori Swanson and her predecessor, Mike Hatch, have come under question for their role in a court settlement that diverted money to a nonprofit whose political wing endorsed Hatch's bid for governor.

Legislative Auditor Jim Nobles recently asked Swanson and Hatch to explain the 2006 settlement, which required a credit card company accused of violating consumer protection laws to give $249,999 to a community advocacy organization, Minnesota ACORN. Its political action committee endorsed Hatch three weeks later.

The money for ACORN was part of a $749,999 settlement agreed to by Capital One. The dollar figure is significant because state law requires that settlement money go to the state -- except when the amount is less than $750,000.

"The dollar amount ... initially, was the major thing that caught my attention," Nobles told the Legislative Audit Commission Monday, calling it "somewhat suspicious."

But he said "the Legislature set the limit, and [the settlement] didn't go over the limit. Any time you set a limit, you open up the possibility that somebody is going to go right up to it and not break the law. And that's what occurred.

"But should you keep your eyes on this? Yes, absolutely," Nobles said. "This is clearly a matter the Legislature should be concerned with, because it is a diversion of money from the general fund."

The Legislature passed the law limiting third-party settlements in 2001, but in 2005 allowed the exception for deals of less than $750,000.

The arrangement came in for criticism by Rep. Steve Simon, DFL-St. Louis Park, who said there were allegations from critics of Hatch and Swanson that "there was an opportunity for a settlement higher than that."

Nobles said he isn't conducting a formal investigation of the matter, but added, "I haven't really closed the door on getting additional information" that would persuade him to pursue the matter further.

The state sued Capital One in 2004, alleging that it published several ads that failed to disclose that its initial lower-interest rates could increase if the customer made a late payment, exceeded credit limits or violated other terms of the contract.

The settlement was signed by Swanson when she was solicitor general for Hatch. Swanson, in a letter to Nobles, referred questions about the settlement to Hatch.

Hatch defended the deal in a written response to Nobles, saying a retired judge who mediated the suit against Capital One told the attorney general's office it would have difficulty proving financial damages because customers had agreed that the bank could change interest rates for any reason.

The judge "was generally unimpressed with the state's statement of the case," Hatch wrote.

Given that weakness in its case, Hatch said, the settlement was appropriate. He said Capital One was "adamant" that it would not pay a civil fine to the state and offered to make a payment to a third party, noting that state law allowed such a payment of up to $750,000.

He said a Capital One representative "raised ACORN" during a conversation at the close of mediation and suggested it as a recipient of settlement money.

Hatch said he insisted that Capital One reimburse the state $250,000 for its investigative expenses in the case and proposed that it give another $250,000 to the Legal Aid Society, which the company agreed to do.

The money for ACORN, which stands for Association of Community Organizations for Reform Now, was to go for "supporting financial advocacy, education and assistance in Minnesota."

Hatch said ACORN is a credible financial counseling service and took issue with Nobles' description of it as a "political advocacy organization."

He also drew a distinction between ACORN and its legally separate political action committee, ACORN PAC, which endorsed him for attorney general in 1998 and 2002, and for governor in 2006. "ACORN PAC did not receive any funding from the settlement," he wrote.

Nobles said the approval of the settlement by a judge is one reason he is reticent to pursue an investigation into it.

In a related issue involving the attorney general, Nobles said he would investigate accusations by current or former staffers that several hundred dollars of federal Medicaid money was misspent on unrelated travel. He said his office is required to inquire because of the involvement of federal money.

Pat Doyle • 651-222-1210