| On
March 29th 2009, Steven Rattner, the co-chairman of President
Obama’s auto task force, met with Rick Wagoner, the
chairman of General Motors, in Rattner’s new office
in the Treasury Department, and in one of the most dramatic
confrontations of the Obama administration in its first
100 days told him he would have to resign because he had
lost the confidence of the Obama Administration. Wagoner,
a 30-year veteran of GM, fell on his sword. Now, Less than
4 month after disposing of Wagoner, Rattner has announced
he himself is resigning.
He now has to deal with the investigation by New York Attorney
General Andrew Cuomo into the role that bribes played in
inducing public officials to invest pension funds in private
equity deals. What brought Rattner, a former golden boy
of investment banking, into Cuomo’s investigative
cross-hairs was deals he made when he headed Quadrangle
Group, which specialized in raising money for leveraged
buy-outs in the communications industry. The largest source
of money for such buy-out funds was pension funds, which
collectively manage about $2.3 trillion, and so he actively
recruited money from state and municipal pension funds.
To get business. he had employed Henry “Hank”
Morris, a top advisor for then-New York State Comptroller
Alan Hevesi to act as a placement agent for Quadrangle.
In March 2009, Morris was arrested and charged in a 123-count
criminal indictment for, among other things, “enterprise
corruption” and “money laundering” in
regard to selling access to the New York State Common Retirement
Fund. Quadrangle had received $100 million from this pension
fund just after paying Morris’s firm a placement fee.
It also paid Morris for his help in getting money from the
Los Angeles pension fund , the New York City pension fund
and the New Mexico pension fund.
It is perfectly legal in these states for a private equity
fund to pay fees to placement agents for this service so
long as it discloses the, Such disclosures are necessary
to identify possible conflicts of interest. Rattner presumably
was familiar with these requirements since he had himself
worked as a placement agent while at Lazard. However, in
garnering investments from the Los Angeles and New York
City pension funds, Rattner’s firm reportedly failed
to disclose the placement fees that went to Hank Morris.
In the case of the Los Angeles pension fund, Quadrangle
identified two other placement agents it used, but not Morris’
firm. One of the key issues New York’s attorney general
is now investigating is whether the New York City Pension
Fund was"intentionally misled or deceived "in
2005 by Quadrangle’s failure to disclose paying finder's
fees to Hank Morris’s firm.
Further increasing Rattner’s exposure to the bribery
scandal, the New York attorney general’s office is
also investigating whether Quadrangle might have evaded
crucial reporting requirements with New York State Common
Retirement Fund in 2005 by having one its private equity
holdings buy DVD rights to a movie that was produced by
the brother of David Loglisci, New York’s deputy comptroller.
Loglisci, a close associate of Morris, was also indicted
with Morris on corruption charges. The low budget movie
entitled “Chooch,” an Italian expression for
a bumbling idiot, had failed at the box-office, taking in
less than $40,000, before Quadrangle’s private equity
holding bought the DVD rights for $88,000. According to
a studio executive who deal with DVD distribution, the DVD
rights to a movie like “Chooch” would be worth
“zilch” since it would “cost more to manufacture
the DVDs than a distributer could realistically hope to
make from their sales.” So was there another benefit
to investing in Chooch? About three weeks after buying these
DVD rights, Quadrangle got its $100 million from the New
York State Common Retirement Fund for which Loglisci was
the top investment officer. Adding to the intrigue, an executive
at the CarlyleRiverstone fund, a joint venture of the Carlyle
Group, which also used Morris’ firm to get money from
the New York State pension fund, made a similar investment
in Loglisci’s “Chooch.” Among the charges
against Loglisci (as well as Morris) is “money laundering.”
To be sure, Rattner himself may be innocent of any wrong
doing in making payments to Morris’ placement agent
company and having a subsidiary invest in Loglisci’s
“Chooch” venture. But with both the SEC and
New York Attorney General Andrew Cuomo investigating these
charges, and Morris and Loglisci due to go on trial in New
York, Rattner may have unfinished business to settle with
Cuomo, and reportedly hired his own lawyer. So ends the
brief tenure of Obama’s auto czar.
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