Private equity fund The Carlyle Group agreed to pay a $20 million penalty to settle an investigation into the “pay for play” scandals surrounding New York state’s pension fund. It also agreed to a code of conduct the bars its employees from making campaign contributions to pension officers and prohibits the use of middlemen to win business from public pensions.
The investigation was led by New York Attorney General Andrew Cuomo’s office. It grew to include the Securities and Exchange Commission and 36 states. Rormer New York state comptroller’s top fund-raiser Henry Morris and the the pension fund’s chief investment officer have been indicted.
Before Carlyle, which as one of the world’s biggest funds manages $85 billion of assets, hired Morris it had only “limited success” in getting chosen to help invest New York’s $122 public pension fund, Cuomo said.
But after Carlyle retained Morris on the advice of a partner, New York’s pension fund committed to invest $730 million with Carlyle.
The private equity fund then paid nearly $13 million to the Connecticut-based broker dealer Searle that worked with Morris, and Searle paid “the lion’s share” of the fees to a shell company that Morris controlled, Cuomo said.
Carlyle, in a statement, said it “was victimized by Hank Morris’s alleged web of deceit,” adding it intends to sue Searle and Morris for more than $15 million to recover the fees it paid and other damages.
Here is the full announcement from Cuomo’s office (via PE HUB):
NEW YORK, NY (May 14, 2009) – Attorney General Andrew M. Cuomo today announced an agreement with leading private equity firm The Carlyle Group (“Carlyle”) to reform the public pension fund investment system and to resolve Carlyle’s role in Cuomo’s investigation of corruption involving the New York State Common Retirement Fund (“the CRF”).
“Our code of conduct will help eliminate the conflicts of interest and corruption inherent in a system that allows people to buy access to those holding the pension fund purse-strings,” said Attorney General Cuomo. “By banning campaign contributions to those who have sway over pension funds and eliminating the third-party intermediaries that have become dens of corruption, we will ensure reform. I commend Carlyle for being the first to embrace the Reform Code and leading the industry toward critical change of the public pension investment system.”
Under the terms of today’s agreement, Carlyle will adopt Cuomo’s Public Pension Fund Code of Conduct. The code of conduct bans investment firms from hiring, utilising, or compensating placement agents, lobbyists, or other third-party intermediaries to communicate or interact with public pension funds to obtain investments. To avoid pay-to-play schemes, the Code prohibits investment firms (and their principals, agents, employees and family members) from doing business with a public pension fund for two years after the firm makes a campaign contribution to an elected or appointed official who can influence the fund’s investment decisions. This provision would also bar all firms currently doing business with the pension fund from making such campaign contributions. Investment firms must also disclose any conflicts of interest to public pension fund officials or law enforcement authorities, to increase transparency and avoid abuse of the fund for personal gain.
As a part of the agreement, Carlyle will pay $20 million to the State of New York to resolve its role in the Attorney General’s ongoing investigation into corruption at the CRF.
The Attorney General’s investigation revealed that in 2003, Carlyle, at the suggestion of a partner, retained Henry (“Hank”) Morris, the chief political aide to then Comptroller Alan Hevesi, as a placement agent to help obtain investments from the CRF. Prior to retaining Morris, Carlyle had experienced limited success in obtaining investments from CRF. However, after retaining Morris, Carlyle obtained approximately $730,000,000 in total investment commitments from CRF in Carlyle funds and Carlyle/Riverstone funds. In exchange, Carlyle paid Searle & Company, the broker-dealer associated with Morris, nearly $13,000,000.
Searle then paid the lion’s share of placement fees received from Carlyle to PB Placement, LLC, a shell company controlled by Morris. Unbeknownst to Carlyle, Morris had allegedly entered into a fee-splitting arrangement to pay Wissman half of all these fees. The investment commitments made by CRF and the related fees paid to Searle and others included:
A $150,000,000 commitment to Carlyle/Riverstone Global Energy & Power Fund II, L.P. made in November of 2003 for which Searle was paid $3,000,000 in fees, $1,425,000 of which went to PB Placement and $1,500,000 of which went to Wissman;
A $100,000,000 commitment to Carlyle Realty Partners IV-A, LP made in April of 2005 for which Searle was paid $1,250,000 in fees, $1,187,500 of which went to PB Placement;
A 80,000,000 Euro commitment to Carlyle Europe Real Estate Partners II, L.P. made in September of 2005, for which Searle was paid $1,158,382 in fees $1,098,160 of which went to PB Placement;
A $350,000,000 commitment to Carlyle/Riverstone Global Energy & Power Fund III, L.P. made in October of 2005 for which Searle was paid $7,000,000 in fees, $3,325,000 of which went to PB Placement and $3,500,000 of which went to Wissman; and
A $30,000,000 commitment to Carlyle/Riverstone Renewable Energy Infrastructure Fund I, L.P. through CRF’s fund-of-fund, The Hudson River Fund II, L.P. made in December of 2005 for which Searle received $600,000 in fees, $285,000 of which went to PB Placement and $300,000 of which went to Wissman.
In addition, soon after the CRF’s $150,000,000 investment in Carlyle/Riverstone Global Energy & Power Fund II, a principal of Riverstone — Carlyle’s joint venture partner — made an “investment” of $100,000 in Chooch, a film produced by the brother of then Chief Investment Officer to Comptroller Hevesi, David Loglisci. Carlyle was unaware of that investment and the investment was not disclosed to the CRF. Carlyle employees also made approximately $78,000 in campaign contributions to Comptroller Hevesi’s campaign between January 2005 and October 2006, some of which were solicited directly by Morris.
Several of the Carlyle investments are alleged as the basis for Martin Act and other charges in the 123-count indictment returned by the grand jury and filed by Cuomo’s office in March against Morris and Loglisci.
Carlyle is one of the world’s largest private equity firms, with over $85.5 billion under management. Carlyle manages 66 funds and operates out of offices in 20 countries in North America, Europe, Asia, Australia, the Middle East/North Africa and Latin America. Carlyle’s principal executive offices are located in Washington, D.C.
“We are pleased to announce today that we have reached a successful resolution with the Attorney General and strongly support his efforts to implement reforms that usher in a new era of transparency and accountability into the pension fund investment process. Carlyle will be the first company to adopt the New York Attorney General’s Code of Conduct and set a new standard for ethics in the industry. We will also make a $20 million payment to New York State to resolve this matter,” stated The Carlyle Group.
Carlyle has also agreed to sign on to the Attorney General’s Public Pension Fund Reform Code of Conduct, which:
Bans Placement Agents: Investment firms are prohibited from using Placement Agents, Lobbyists, or any other third-party intermediary to communicate or interact with Public Pension Funds for any purpose. The prohibition does not apply to the use of consultants and investment banks to otherwise directly assist investment firms by, for example, preparing marketing materials or performing due diligence;
Bans “Pay to Play”: Prohibits investment firms (and their principals, agents, employees and family members) from doing business with a public pension fund for two years after the firm makes a campaign contribution to any elected or appointed official who can influence a public pension fund’s investment decisions. The prohibition also applies to candidates for such positions, but does not apply to contributions of $300.00 or less to elected officials or candidates for whom the person making the contribution can vote;
Increases Transparency: Requires rigorous, ongoing disclosure of information relating to campaign contributions, the identities, responsibilities and qualifications of investment fund personnel and any payments by investment firms to third-parties in connection with public pension fund matters. Also requires investment firms to promptly publish such information on their websites;
Imposes Higher Standard of Conduct: Holds investment firms to a higher, standard of conduct that avoids even the appearance of impropriety. The Code prohibits (1) improper relationships between pension fund officials and an investment firm’s personnel or agents, (2) “revolving door” employment by investment firms of former public pension fund officials and employees, and (3) improper gifts by investment firms to public pension fund employees and officials.
Enhances Conflicts of Interest Policies: Investment firms are required to promptly disclose and cure any actual, potential and apparent conflicts of interest to public pension fund officials or law enforcement authorities where appropriate.
Ensures Ongoing Compliance: Investment firms must certify annually to the Office of the Attorney General (and any public pension fund that asks) that they are in compliance with the Code of Conduct. Violations of the Code constitute grounds for either termination of an existing investment, disqualification from doing further business with the public pension fund for up to 10 years, or both.
Attorney General Cuomo’s investigation into corruption at the CRF has led to a number of criminal charges to date, including charges against Morris and Loglisci. Former Liberal Party Chair Ray Harding, and investment advisor Saul Meyer. In addition, Julio Ramirez, an unlicensed placement agent associated with Wetherly Capital, and Wissman have both pleaded guilty to Martin Act securities fraud charges for conduct related to the pension fund. Morris, Loglisci, Meyer, and Harding are presumed innocent until they are proven guilty in court.
Cuomo also issued subpoenas earlier this month to over 100 investment firms and their agents after his investigation found that 40 to 50 per cent of agents obtaining investments from New York pension funds were unregistered.
Today’s announcement arises from a two-year, ongoing investigation into corruption involving the New York State Comptroller’s Office and the Fund. The charges to date allege a complex criminal scheme involving numerous individuals operating at the highest political and governmental levels under former Comptroller Alan Hevesi, in which the New York state pension fund was used as a piggy bank for the Comptroller’s chief political aide and a favour bank for political allies and other friends.
The investigation is being conducted by Stacy Aronowitz, Deputy Chief of the Public Integrity Bureau, and Assistant Attorneys General Emily Bradford, Rachel Doft, Noah Falk, and Amy Tully, under the supervision of Ellen Nachtigall Biben, Special Deputy Attorney General for Public Integrity, and Linda A. Lacewell, Special Counsel, and with the assistance of Richard Jackson, Assistant Solicitor General.