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— Private Equity —
 For some years now, New York has harbored a veritable Pandora's box of pay-to-play scandals waiting to blow up. About a decade ago, allegations of questionable dealings by then-New York City comptroller Alan Hevesi surfaced, after the city pension funds that he headed approved a $130 million investment to a three-year-old private equity firm whose owners had contributed more than $100,000 to Hevesi's political campaign. Nothing came out of those allegations, though stories persisted. Now the lid has blown off the box. Over the past two months, New York State Attorney General Andrew Cuomo has handed down indictments relating to a kickback scheme alleged to have taken place since 2003 under Hevesi's watch as state comptroller. Cuomo's office and the Securities and Exchange Commission are investigating whether private equity and hedge funds made improper payments to intermediaries in return for state pension money. Charges have been filed against Dallas fund-of-funds Aldus Equity Partners and its founder, Saul Meyer, for allegedly participating in the kickback scheme.
The investigation, which has spread to the city's comptroller's office, continues, but the stark revelations contained in the indictments illuminate the shadowy side of buyout funds and their reliance on influential intermediaries who may sometimes transgress legal bounds. The indictments triggered a sweeping ban on the use of placement agents, paid intermediaries and lobbyists that State Comptroller Thomas DiNapoli imposed on April 22. The move, which some brand an overreaction, has spurred similar calls to action elsewhere, reviving a long-simmering debate on how best to regulate pay-to-play practices. Reactions ranged from wholehearted support to disappointment. While everyone agrees that such pay-to-play practices that have long bedeviled public pension funds need to be reined in, it's not easy when individuals in public offices connive with investment firms, with or without middlemen. "There is a very real issue for pension funds in terms of graft and corruption," an East Coast investment adviser says. Many have tried to achieve a balance -- not always successfully -- seeking to limit influence peddling by well-connected lobbyists, and tolerating legitimate political contributions relied upon by elected officials for campaign funds. A few states such as Connecticut, which like New York, North Carolina and Michigan, places all pension decisions in the hands of a sole trustee, have instituted disclosure laws on contingency fees paid to third-parties. Following disclosures in 1999 of a kickback and corruption scandal involving former Treasurer Paul Silvester, the Connecticut state legislature, urged by Silvester's successor, Denise Nappier, enacted laws requiring Treasury vendors to disclose third-party fees and consulting agreements. Silvester pleaded guilty to federal bribery and money laundering charges in 1999. He agreed to become a government witness, resulting in the indictment of private equity firm Triumph Capital Group, the first such prosecution of a PE firm. "Connecticut introduced a thoughtful process, which has been the preferred approach," says Russell Pennoyer, president of Benedetto, Gartland & Co., a New York investment banking boutique. California, home to the country's largest pension fund, California Public Employees' Retirement System, has had mixed success. CalPERs has seen numerous pay-to-play allegations, including a case in the late '90s, when CalPERs invested $100 million in Thomas Hicks' former firm, Hicks, Muse, Tate & Furst Inc. The commitment raised a potential conflict of interest issue after the head of Pacific Corporate Group, CalPERs' adviser on the deal, sold a yacht to Hicks for a big profit. The FBI reportedly conducted an inconclusive investigation. In 1997, the California legislature passed a law barring campaign contributions to elected officers. But the law was tossed after Kathleen Connell, a member of CalPERs' board, successfully challenged it in court, arguing that the law made it harder for incumbents than for challengers to raise campaign money. The California State Teachers' Retirement System has had its set of rules on disclosure and restrictions on campaign contributions since 2006. CalPERs says it is weighing a new policy. In New York, lawyers and private equity practitioners say there's a perception surrounding the New York State Common Retirement Fund that the investment process was tainted. "It's been widely known for some time to people in the business that you wouldn't get money unless you did certain things," says one New York placement agent. "You had a sense that you wouldn't get anywhere without politics." Since the late '90s, when the New York State Common Retirement Fund under then-Comptroller H. Carl McCall began investing in private equity, stories have cast suspicions over potential ties between the pension fund's commitments to certain PE funds with fund managers' campaign donations to McCall. Hevesi was forced to resign from office three years ago on unrelated charges of defrauding the government by using state workers to chauffeur his wife. SEC chairwoman Mary Schapiro has said the agency is now reconsidering a proposal made in 1999, under chairman Arthur Levitt Jr., seeking to ban money managers from doing business with public pension funds for two years after making political contributions to public officials. The proposal was shot down by state treasurers and legislators who said it didn't distinguish between influence peddlers and legitimate contributors. Cuomo's office and the SEC have filed 123 charges against David Loglisci, Hevesi's chief investment officer, and Hank Morris, Hevesi's political adviser. Morris was accused of extracting $30 million in fees while acting as go-between to funds managed by Carlyle Group and Quadrangle Group LLC, among others. Carlyle declined comment and Quadrangle did not return calls for comment. Many practitioners believe banning placement agents is over-reaching. For New York, it may not make a difference since less than 10% of the fund's transactions involve agents. But similar bans may have an impact elsewhere. "For those of us who have been trying to get money from the state for a long time and haven't been successful, it doesn't really change the picture," says the placement agent. "It's not exactly like the door has been slammed shut -- that would assume it was open to begin with." Professional agents are not just "finders" but advisers on due diligence and fundraising. Reputable ones are registered broker/dealers that disclose to the SEC, says Kelly DePonte, managing director at investment advisory firm Probitas Partners. Several sources cite instances where they had taken issue with state officials under Hevesi over investment decisions involving specific funds. One source says he was once told by a general partner in a private equity fund that received money from the state that it was "bought." "It's comical," says Robert Morris, founder of Stamford, Conn.'s Olympus Partners, who believes the problem isn't placement agents but individuals that corrupt the process. -- Christine Idzelis contributed to this article. |
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