Firm Founded by Auto Task Force Chief Facing Inquiry
Friday, April 17, 2009
An investment firm co-founded by the head of the Obama administration's auto task force is under scrutiny in an investigation into what authorities allege was a pay-to-play scheme involving the New York state pension fund.
The firm, Quadrangle Group, was co-founded in 2000 by Steve Rattner, who earlier this year was named head of the high-profile auto task force now negotiating a restructuring of General Motors and Chrysler.
At the center of the two-year investigation, by New York Attorney General Andrew M. Cuomo and the Securities and Exchange Commission, are millions of dollars in payments made by Quadrangle and about a dozen other hedge funds and private-equity firms to middlemen who connected the firms to New York's $122 billion pension fund.
The controversial payments, known as "placement fees," are a common industry practice and not illegal. The authorities are investigating whether Quadrangle and other investment managers knowingly participated in a pay-to-play scheme to get investments from the state pension fund, according to people familiar with the case.
Authorities are also investigating whether these firms adequately disclosed their use of middlemen. Cuomo and the SEC have alleged that the middlemen won business for the firms through illicit payments.
So far, three people have been charged and one, a hedge fund executive, pleaded guilty this week. Those facing charges include Hank Morris, a former top adviser to then-state Comptroller Alan Hevesi, and David Loglisci, former chief investment officer for the pension fund, who were indicted last month on 123 criminal counts, including corruption, bribery and money laundering.
Quadrangle's role in the case is detailed in an amended SEC complaint filed Wednesday. The company's involvement was reported by the New York Times this week.
Other politically connected investment firms, such as District-based Carlyle Group and Paladin Capital, founded by Michael Steed, a former executive director of the Democratic National Committee, are also named. None of these firms or their executives has been charged. Cuomo and SEC Chairman Mary L. Schapiro have made clear that the investigation is ongoing and that more charges could be coming.
A Treasury Department spokesperson declined to comment on the details, but said, "During the transition, Mr. Rattner made us aware of the pending investigation." A spokesman for Quadrangle could not be reached for comment.
According to the SEC complaint, an unnamed "senior executive" of Quadrangle met with Loglisci in late 2004 to solicit investments. Quadrangle invests in the media and telecom sectors.
That meeting was followed by another in which Morris solicited a "finder's fee arrangement" with Quadrangle, the complaint said. Although Quadrangle already had retained a placement agent, it signed a contract to pay a placement agency affiliated with Morris 1.1 percent of any amount invested by the pension fund.
In January 2005, a Quadrangle affiliate agreed to pay $88,841 for the DVD distribution rights to a low-budget film, "Chooch," produced by Loglisci's brother. That payment took place after a meeting between the senior Quadrangle executive and Loglisci's brother.
"When the Chooch DVD distribution deal was agreed upon, the Quadrangle executive immediately notified Morris of that fact and the connection to Loglisci," the complaint said. "Three weeks later, [David] Loglisci personally informed the Quadrangle executive that the Retirement Fund would be making a $100 million investment in the Quadrangle Fund."
Quadrangle received the investment in September 2005; Quadrangle paid the placement agency $1.125 million in fees, the complaint said. The "Chooch" distribution agreement with Quadrangle "and the conflict of interest that it created" were never disclosed, according to the SEC complaint.
Staff writer Peter Whoriskey contributed to this report.