Carlyle Settles Pension Probe

The Carlyle Group, one of the world's largest private-equity firms, has agreed to pay $20 million and stop using politically connected operatives to land business with government pension systems around the country, New York Attorney General Andrew M. Cuomo announced yesterday.

Cuomo intends the first-of-its-kind settlement to serve as a model for nationwide restrictions aimed at ending corruption and conflicts of interest in public pension funds. He said he hopes that Congress or the Securities and Exchange Commission ensure those limits are applied across the pension investment industry.

"This is a revolutionary agreement," Cuomo said in a conference call with reporters. "I believe it totally changes the way people operate: It ends pay to play, it bans the selling of access, it puts the political power brokers out of business."

Carlyle, a District-based firm with more than $85 billion under management, made millions of dollars in payments to influential intermediaries in exchange for investments from the New York state pension fund, according to the settlement.

The company, which has denied any wrongdoing, described itself as the victim of the intermediaries and said it did not know these middlemen might have been engaged in corrupt activity. The deal with Cuomo's office resolves all criminal and civil complaints against the firm and its executives.

"We were the unwitting beneficiaries of a corrupt system," said a Carlyle official who spoke on condition of anonymity because he was not authorized to discuss the matter publicly. "The $20 million payment is effectively returning some of the economic benefit that unwittingly accrued to us."

Cuomo said intermediaries, known as placement agents, should have no place in the public pension system.

"If Boss Tweed were alive today, he would be a placement agent," Cuomo said.

As part of the code of conduct that Carlyle has agreed to follow, the firm cannot hire or use placement agents, lobbyists or other intermediaries to interact with public pension funds to obtain investments. The code also requires firms doing business with pension funds to disclose conflicts of interest and prevents them from making campaign contributions to officials who can influence the pension fund's investment decisions.

In a statement, Carlyle said it strongly supported Cuomo's "efforts to implement reforms that usher in a new era of transparency and accountability into the pension fund investment process."

Cuomo said the fact that Carlyle, considered to be the second-largest private equity firm, agreed to abide by his code of conduct shows that it is possible to do business without the intermediaries. He hoped that the code would soon be adopted nationwide through a combination of action by states, Congress, the SEC or further settlements with his office.

"Our ultimate goal is to get that code enacted," he said. "It is feasible for the industry."

Carlyle's settlement springs from a two-year investigation by Cuomo's office into the New York state pension fund. The probe has expanded into a nationwide inquiry by federal and state prosecutors into corruption in the pension industry.

In New York, the focus has been on ways that friends, relatives and associates of Alan G. Hevesi, a former state comptroller, might have profited by selling access to the $122 billion pension fund he controlled. Carlyle used Henry "Hank" Morris, a top aide to Hevesi, as an agent to obtain $730 million in investments from the pension fund, according to the settlement.

Carlyle paid nearly $13 million to a company that Morris worked for, Searle & Co., which then paid nearly half that amount to Morris, according to prosecutors. Morris, whose attorney did not respond to a request for comment, is facing a 123-count indictment on fraud charges.

In a statement, Carlyle said it plans to file a lawsuit seeking more than $15 million in damages from Morris and his firm.

"Carlyle was victimized by Hank Morris's alleged web of deceit," the company said.