Wednesday, April 22, 2009

NYS Pension Pay To Play Investigation Expands

Steve Rattner's troubles are going from bad to worse, and it's dragging down the private equity fund Quadrangle, which benefited from Rattner's contacts. The investigation into pension pay-to-play is expanding from New York to Los Angeles, New Mexico, and beyond.
Quadrangle hired a firm that had been run by Hank Morris, a now-indicted associate of New York’s former comptroller, to help gain business in New York, state and federal authorities contend. While the New York fund accounted for a only a small portion of Quadrangle’s investments, the prestige associated with it helped the firm lure other big investors.

Quadrangle also hired Mr. Morris’s firm, Searle, to help raise money from pension funds in New York City, New Mexico and Los Angeles, according to a person with knowledge of the arrangement.

Mr. Rattner was personally involved in discussions about using Mr. Morris to gain pension business. In 2005, for instance, Mr. Rattner discussed hiring Mr. Morris with the head of the New Jersey pension fund, who told him such a move would not benefit Quadrangle, according to a person briefed on the investigation, which is being led by the attorney general of New York and the Securities and Exchange Commission.

Mr. Rattner, a major Democratic fund-raiser, has social and political connections. He is friends with the mayor of New York City, Michael R. Bloomberg, and Quadrangle manages the mayor’s personal fortune. Mr. Bloomberg said in a statement on Tuesday that he had no plans to move his money and that Quadrangle was doing “a great job.”

Mr. Rattner headed much of Quadrangle’s effort to raise money from pension funds in 2005, when the firm attracted money from the New York fund and others.

Mr. Rattner forged close personal ties in New Mexico, which invested $20 million in Quadrangle. He met with Senator Jeff Bingaman, a Democrat from that state, on at least one occasion, according to a person with knowledge of the meeting. From about 2004 until early this year, Quadrangle also employed the senator’s son as an associate.

A spokeswoman for Senator Bingaman said that the senator’s son did not raise money for Quadrangle, but instead helped make investments. Senator Bingaman was not involved in the pension process, she said.

The accusations involving Quadrangle were included in an S.E.C. complaint last week that detailed a three-year-long investigation into corruption in New York state’s pension plan. Quadrangle and several other private equity funds, among them the Carlyle Group, were named in the complaint.

Mr. Rattner turned to Mr. Morris after meeting Josh Wolf-Powers, then managing director of private markets for the New York City comptroller, about the beginning of 2005. Mr. Wolf-Powers told Mr. Rattner that he could not think of any investment firm that had persuaded the city’s pension fund to invest without using a placement agent.

Mr. Rattner left the meeting irritated that his own considerable connections did not seem to be enough. He soon hired Mr. Morris.

Payments to placement advisers like Mr. Morris, can be legal but often raise questions about conflicts of interest and would be illegal if used to bribe public officials.

After Mr. Rattner left, Quadrangle executives flew to California to try to persuade three pension funds to stick with the firm.

Before Mr. Rattner left, Quadrangle stood to earn about $60 million more in management fees on its second fund, which is allowed to make new investments through the end of 2010. The partners at the firm are now offering to cut about $5 million of those fees. In early April, Quadrangle organized a conference call for its investors. Calpers, the big California pension fund, pushed other investors to demand that Quadrangle reduce its fees, according to two investors who were on the call. The Pennsylvania teachers’ pension fund was among those willing to support the firm without any concessions.
In response to all this, current New York State Comptroller Tom DiNapoli has banned the use of placement agents from involvement in the pension system. New York City Comptroller William Thompson (who is looking to run for Mayor) is also looking into Rattner's actions, and whether Rattner lied about the ties with Morris and naming Morris as a placement agent.

Instapundit links. Thanks!

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