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Private-Equity Firms Under Scrutiny
U.S., N.Y. Probing Possible Pension-Fund Kickback Scheme

By Zachary A. Goldfarb and Tomoeh Murakami Tse
Washington Post Staff Writers
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.

The House Committee on Education and Labor is planning to look at the issue of placement fees during a series of hearings currently being held, according to Rachel Racusen, a spokeswoman for the committee.

In addition to requesting records and e-mails, New York prosecutors and the SEC have been interviewing members of several investment firms to learn what they knew about the alleged pay-to-play scheme.

In court filings and public statements, prosecutors and the SEC have said that some firms were aware of the questionable arrangements.

"Private equity firms and hedge fund managers . . . together paid millions of dollars to Morris and others in the form of sham 'finder' or 'placement agent' fees in order to obtain those investments from the Retirement Fund," the SEC said in its complaint. "These payments to Morris and others were, in fact, little more than kickbacks that were made pursuant to undisclosed quid pro quo arrangements."

Cuomo and SEC Chairman Mary L. Schapiro made clear several weeks ago that the investigation is far from over.

"There are going to be future cases, future developments," Cuomo said. Asked whether the SEC was looking at other jurisdictions and whether pay-to-play practices are endemic among hedge funds, Schapiro said: "This is an area of focus for us. We are committed to rooting out misconduct that involves the intersection of securities markets and government officials."

Connecticut's attorney general, Richard Blumenthal, recently reached a $470,000 settlement with a broker that was accused of accepting concealed compensation from insurers in exchange for access to lucrative pension-plan business.

Blumenthal said he has had "some leads or inquiries" regarding placement fees by hedge funds and private-equity firms, adding: "It's an area that's worth watching and monitoring and scrutinizing because it is potentially problematic, given the nature of the work and size of the fee."

The inquiry into the role of investment funds in the alleged pay-to-play scheme was reported yesterday by the New York Times.

In the indictment last month, a number of firms were named, though not charged, as having paid fees to companies created by Morris. Firms under scrutiny have included Access/NY European Fund, Aldus New York Emerging Fund, GKM/NY Venture Capital Fund, Paladin Homeland Security Fund and Pequot Private Equity Partners Fund.

The investigation is more than two years old, but the SEC more recently joined the case.

The SEC suspects that some funds did not adequately disclose information about their use of Morris to get access to the fund, according to a person familiar with the probe.

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