As we described earlier, former Quadrangle partner Steve Rattner–now Obama’s car czar–has been dragged into a New York state retirement fund kickback scandal that led to several indictments earlier this week.
The SEC’s version of the story, as detailed here, makes it sound as though Rattner and Quadrangle bribed the state official who allocated the retirement fund (who has since been indicted). First, Quadrangle paid a $1.1 million “finder’s fee” to an indicted co-conspirator. Second, a Quadrangle affiliate bought the distribution rights to a lousy movie produced by New York state fund employee’s brother for $89,000.
We have now received some additional information about these events that makes us less concerned that Quadrangle behaved unethically.
Based on what we know now, the “finder’s fee” seems to be a non-issue. The timing of the movie deal still looks bad, but our sense is that this is just the dreaded “appearance of impropriety” rather than actual impropriety. This doesn’t mean Steve Rattner shouldn’t have been more careful when dealing with officials representing public retirement funds. It does mean that he’ll likely survive this scandal.
Here is our current understanding of what happened:
Quadrangle retained the placement agent who received the $1.1 million finders fee prior to the first meeting with the state official. The SEC complaint says that the finder’s fee was negotiated after the original meeting. This difference is important. The SEC’s version of the story makes it sound like an after-the-fact, pay-to-play deal. If Quadrangle actually retained the placement agent prior to meeting the state official for the first time, this is more likely a case in which the firm employed multiple placement agents. The latter is a common practice in the industry, and it would not be a concern here.
The movie deal was a typical “friends of Steve Rattner” affair in which Rattner made a mutually beneficial introduction. Steve Rattner met with the producer of the movie (the New York state official’s brother) as a favour to the placement agent and the New York state official. He then referred the official’s brother to GT Brands, a Quadrangle-owned company that did such deals in the normal course of business. GT then acquired the movie DVD distribution rights with a normal revenue-sharing type of structure (not an upfront cash payment, as the SEC complaint suggests). Rattner reported this happy news to the placement agent, who presumably relayed it to the New York state retirement official. Eventually, the movie actually made a bit of money.
In this context, the movie deal looks bad no matter how you spin it, and there are still plenty of questions to answer (Did Rattner pressure GT Brands to buy the movie, etc.?). But this sort of mutual back-scratching goes on all the time in the business world, and there’s usually nothing nefarious about it.
Given the connection to public retirement money, Rattner should have realised how bad the timing of this particular interaction might look if it ever came out–as he now assuredly has. But if our current understanding of the situation is accurate, it’s not actually bad–it just just looks that way.
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