Private-Equity Firms Under Scrutiny
Wednesday, April 15, 2009
Federal and state authorities are investigating whether Carlyle Group and other private-equity firms and hedge funds knowingly participated in a pay-to-play scheme to get investments from New York state's pension fund, according to three people familiar with the case.
New York Attorney General Andrew M. Cuomo has subpoenaed several firms that got business from the $122 billion pension fund after using the services of a middleman who connected investment firms with potential investors, the sources said. Cuomo and the Securities and Exchange Commission have alleged that the middleman won business for the firms through illicit payments.
The SEC also is investigating whether these firms adequately disclosed their use of the middleman to the pension fund, to ensure that the fund was aware of any special access enjoyed by the firms, one of the sources said. The sources spoke on condition of anonymity because they were not authorized to discuss ongoing investigations.
Carlyle, based in the District, has been one of the largest recipients of New York state pension money. Carlyle was involved in five investments totaling about $730 million in capital commitments from the state pension fund, according to court documents.
"Carlyle has fully cooperated with the New York Attorney General's investigation. We understand this is an industry-wide investigation and that we are not the focus of the investigation," Carlyle spokesman Christopher Ullman said in a prepared statement.
Carlyle's use of politically connected consultants has come under scrutiny before, but Ullman defended its relationships with consultants.
"Our agreements with placement agents, whether large Wall Street firms or smaller broker-dealers, call for all parties to abide by all laws to ensure the integrity of the investment process," he said. "Carlyle is pleased to currently serve the pensioners of New York, Illinois and Connecticut and has achieved excellent returns in several funds on their behalf."
The inquiry comes after Cuomo and the SEC filed criminal and civil charges last month against Henry Morris, a former top aide to former New York comptroller Alan G. Hevesi, and David Loglisci, the pension fund's former chief investment officer.
Morris and Loglisci were accused of directing pension-fund money toward investment firms in exchange for kickbacks and other bribes. They have denied wrongdoing. They obtained $30 million in fees and gifts, according to court documents.
The inquiry is the latest cloud to come over the business of consultants who help pension funds find places to put their money.
Experts on public pensions said that while some consultants serve a legitimate purpose by helping firms find proper investment clients, many consulting companies are primarily a vehicle for investment firms seeking business to gain political connections.
Investment funds said that using consultants is often needed to get investment firms an audience with a pension fund. But there have been several scandals around the country involving the investments made by pension funds with the help of agents.