The board of an Illinois pension fund planned to ask District-based Carlyle Group last week about millions of dollars it paid a politically connected lobbyist for help in winning half a billion dollars in investments from the fund.
However, when Carlyle Managing Director David M. Rubenstein appeared in Chicago on Thursday, the board of the Illinois Teachers' Retirement System refrained from asking about the finder's fees paid to Robert Kjellander, an Illinois lobbyist who was recently elected treasurer of the Republican National Committee. The board wanted to avoid interfering with a federal investigation, said John Day, a spokesman for the pension fund.
Neither Carlyle, a prominent investment management firm, nor Kjellander has been accused of any wrongdoing. But the episode highlighted a broader inquiry that is roiling the pension board and companies that do business with it.
On Aug. 3, a federal grand jury indicted former pension fund board member Stuart Levine on charges of soliciting kickbacks from investment firms seeking business with the pension fund. Levine has pleaded not guilty, said his attorney Marc W. Martin, who declined to comment further.
The Justice Department has been investigating business dealings with Illinois state boards, and the probe is continuing, said Randall Samborn, a spokesman for the U.S. attorney's office in Chicago.
"We have no reason to believe that we are a subject of their investigation," Carlyle spokesman Christopher Ullman said. "Carlyle did everything the way it should have been done."
The relationship of Carlyle, lobbyist Kjellander and the state pension fund has become a focus of attention in Illinois since the Chicago Tribune reported on it this month.
The pension fund manages more than $30 billion of retirement assets for teachers and administrators in Illinois public schools.
Carlyle retained Kjellander in 2002 in an effort to land a share of the fund's investments. It agreed to pay Kjellander's consulting firm up to 1 percent of the capital the pension fund committed to invest with Carlyle, spokesman Ullman said. The investment firm has paid $3.1 million under that agreement and owes $1.4 million, Ullman said.
Kjellander, who chaired President Bush's reelection campaign in the Great Lakes region, was elected treasurer of the Republican National Committee on Aug 5.
On Friday, the board of the Illinois Teachers' Retirement System decided to prohibit future finder's fees for intermediaries such as Kjellander, said Day, its spokesman. The pension fund will continue to allow such fees for investment banks and "recognized third-party marketers," Day said.
There's disagreement over what Kjellander did to earn his finder's fees.
The current staff of the pension fund cannot recall having any interaction with Kjellander or his consulting firm, Day said, adding that he was not speaking for members of the pension fund's board.
The Chicago Tribune reported that, according to the pension fund's executive director, Kjellander had contact with Levine, the former pension board member who has since been indicted.
Kjellander said that he may have had contact with Levine, but that if so, it would have been simply to ask that Carlyle be given a fair chance, the Tribune reported.
Kjellander did not return calls seeking comment. A lawyer representing him, Mark L. Rotert, said that what Kjellander did to earn his Carlyle fees is "not something about which I feel like I'm particularly knowledgeable."
"The folks at the Teachers' Retirement System may not know all of the details about the work that Mr. Kjellander does either," Rotert added.
Ullman said Kjellander told the Carlyle Group that he had a number of meetings on Carlyle's behalf with members of the pension fund staff and board, including the executive director. Carlyle personnel did not attend the meetings, Ullman said.
"We are relying on reports from him," Ullman said.
Asked how many hours Kjellander had worked to earn the $4.5 million in fees, Ullman declined to comment.
Carlyle, which also has about $30 billion of assets under management, is known for the Washington luminaries who have worked for it in various capacities. Former President George H.W. Bush gave speeches on the firm's behalf, and former Secretary of State James A. Baker III was a senior counselor to the firm until this spring. For years, the firm was led by former defense secretary Frank C. Carlucci.
The firm pools funds from others to invest in real estate, technology ventures, and corporate buyouts of aerospace and defense firms, among other things.
Carlyle predicts that, over more than 10 years, it will double the Illinois pension fund's money, generating annualized returns of about 20 to 25 percent, Ullman said.
Carlyle turned to Kjellander after making several unsuccessful attempts to do business with the pension fund, Ullman said. The firm enlisted Kjellander to introduce the firm to the pension fund "and help them understand who we are, our products and services, and . . . the types of returns that we're able to provide," Ullman said. Kjellander "did a very good job at it," Ullman said.
"Rather than use a more expensive Wall Street firm, we decided to use someone from Illinois who was familiar with the state and the different institutions there," Ullman said.
Carlyle disclosed its fee arrangement with Kjellander to the pension fund, Ullman said. The fees have no financial impact on the pension fund, he said.
The Illinois controversy has become a subject of partisan political debate.
Democratic National Committee Chairman Howard Dean called attention to Kjellander's fees and the federal probe in a statement last week, saying, "The roots of the Republican culture of corruption are getting deeper."
Asked about Dean's jab at Kjellander, Republican spokesman Danny Diaz said the RNC "is fortunate to have such an accomplished and experienced individual serving as the treasurer."
The federal investigation in Illinois has targeted a major Democratic fundraiser, Chicago lawyer Joseph Cari. Cari served as one of the DNC's finance chairmen during the 2000 elections and previously was finance chairman of the Democratic Senatorial Campaign Committee.
Indicted along with Levine, the former pension board member, Cari was charged with one count of attempted extortion. He intends to plead guilty and is cooperating with the government, said his attorney, Scott R. Lassar.
The indictment alleged that Cari helped Levine in an unsuccessful attempt to shake down a Virginia real estate investment firm last year for $850,000 by pressuring it to hire a particular consultant.
Cari told lawyers for the unnamed Virginia firm that it wouldn't get the $85 million investment it was seeking from the pension fund unless it agreed to the consulting deal, the indictment said.
"Cari said this was how things are done in Illinois," the indictment said.
The Virginia firm did not sign the consulting contract, but that didn't stop it from getting the $85 million commitment, the indictment said.
According to Chicago news reports, federal authorities have subpoenaed records from the pension fund relating to its deals with a number of firms, including Hopewell Ventures, founded by David C. Wilhelm, a former DNC chairman and manager of Bill Clinton's presidential campaign in 1992.
"Our lawyers have confirmed that neither David nor Hopewell are the subject of any investigation by the U.S. attorney's office," Wilhelm spokesman David Lundy said.
Wilhelm's firm did not use a consultant to win business from the pension fund, Lundy said. Another spokesman for Wilhelm, Kenneth Jakubowski, said it appears that the government is looking at all the investments the pension fund made while Levine was on the board.