The
corruption of pension funds by private interest is hardly
a new phenomenon. Las Vegas after all was largely built
with money from the Teamster’s Central States Pension
Fund, with the intermediary Sidney Korshak, a mob- connected
lawyer, channeling a large part of it to casino owners.
Korshak himself was never conducted of any wrongdoing, but
Jimmy Hoffa, the President of the International Teamster
Union, was imprisoned on corruption charges in 1971, Then,
after getting a pardon from President Nixon in 1974, he
literally disappeared without a trace (his body, according
to the latest FBI theory, had been cremated by his associates
in organized crime). Today, Pension fund financing is a
far more respectable and civilized industry. It is also
vastly richer, with pension fund s holding over $2.7 trillion
in assets, and providing private equity firms with the most
of the capital they use for their leveraged buy-outs, real
estate acquisitions and other ventures. In return for allowing
pension funds to participate in their deals, the private
equity firms exact lucrative fees, taking both a percent
of their total investment– typically two percent per
year– and part of the profits– usually 20 percent
of each successful deal. In 2008, the ten largest pension
funds had allocated $105 billion to such private equity
deals, creating a veritable El Dorado. To mine this mother
lode, private equity firm had to first access to the functionaries
at the pension fund who controlled these allocations, and
while there is no single powerful intermediary in the class
of Sydney Korshak, there are legions of less visible intermediaries
called, “placement agents,” who use their political
contacts, financial experience, powers of persuasion, and
other means to extract pension fund money for private equity
firms. Indeed, it is now a multi-billion dollar industry.
In return for inducing pension fund officials to invest
in such deals, they get a cut from the private equity firm
of usually between 1 and 3 percent of the total commitment.
Since placement agents gets nothing if they fails, they
have a powerful incentive to do what is necessary to close
the deal. The question currently concerning New York State
Attorney-General Andrew Cuomo, the SEC, and some 36 other
state attorneys general law is: how do they accomplish their
amazing feat of inducement?
According to Cuomo, who is spearheading the investigation,
there is " a matrix of corruption, which grows more
expansive and interconnected by the day." So far six
people have been charged criminally and two people have
pleaded guilty. Among those charged with “enterprise
corruption” are Henry "Hank" Morris, and
his friend David J. Loglisci. Morris, a former top aide
to former New York Comptroller Alan Hevesi, who was in charge
of New York’s $122 billion pension, raked in at least
$15 million dollars in “placement” fees from
private equity firms. Former deputy comptroller Loglisci,
the top investment officer of the state’s pension
fund, allegedly got paid from Morris and also had private
equity firms steer money into a curious movie venture called
“Chooch he and his brother produced, and whose plot,
aptly enough, concerns a bag of mystery money. Both Morris
and Loglisci deny any wrong doing and are currently awaiting
trial.
Cuomo’s game plan, according to one lawyer knowledgeable
about the investigation, is “to work his way up the
food chain.” This strategy, as the lawyer explained,
involves making deals with less-culpable parties in return
for their cooperation and testimony against other private
equity firms whose real exposure comes not from their making
payments to placement agents, which is perfectly legal in
most states, but from their failure to disclose them or,
even worse. “disguising them” as sham transactions.
Consider the recent guilty plea of placement agent Julio
Ramirez Jr. to a misdemeanor securities fraud violation.
According to Cuomo’s office, Ramirez, , who worked
for the placement agent Wetherly Capital Group in Los Angeles,
entered into a “corrupt arrangement” with Hank
Morris to get private equity firms $50 million in investments
from New York's $122 billion Common Retirement Fund. Ramirez
then split his fees with Morris, but did not disclose Morris’
involvement. Since that omission made him vulnerable to
prosecution, he elected to cooperating with the Cuomo’s
investigation, further tightening the prosecutorial vice
on Hank Morris.
Cuomo also made settlements with the Carlyle Group, one
of the nation’s largest private equity firms and Riverstone
Holding a private equity company headed by David M. Leuschen.
Their joint venture had paid $10 million to Hank Morris’
firm for its help in getting it $730 million in investments
from the New York Pension fund. Leuschen, had also invested
$100,000 of his own money in the movie Chooch, a movie venture
that involved David Loglisci, the chief investment officer
of that pension fund. Since the joint venture had fully
disclosed its payments to Morris’s firm and could
claim that it was not involved in Leuschen’s personal
investment in the Chooch investment, Cuomo made a deal with
both Carlyle and Riverstone in which each paid a fine–
Carlyle $20 million and Riverstone $30 million and agreed
not to use placements agents in any future deals and to
fully cooperate in the ongoing investigation. In addition,
Carlyle, issued statement saying that it "was victimized
by Hank Morris's alleged web of deceit." It also moved
to sue both him and his company for more than $15 million
in damages, further racheting up the pressure on Morris
to make a deal. The settlement did not include Leuschen,
who is still, according to Cuomo, “under investigation.”
It also does not bode well the 20 other investment firms
ensnared in Cuomo’s Matrix. The Quadrangle Group,
for example, paid Morris placement multi-million dollar
fees for assisting it get pension fund money in New York,
New Mexico, and California and also invested money in the
mysterious Chooch venture. But, unlike Carlyle and Riverstone,
Quadrangle failed to disclose it’s the fees it paid
Morris’ company to New York City Pension Fund and
the Los Angeles Fire and Police Pensions Fund. Nor can it
separate itself from its Chooch investment by, as Carlyle
and Riverstone did, shifting responsibility to a personal
investment, since it had one of its own private equity holdings
buy the video rights to movie. One possible problem for
Cuomo– as well as the SEC investigation is the prominence
of Quadrangle’s then chairman Steven Rattner, who
in 2009 became a key member of President Obama’s task
force that is presently desperately working to save General
Motors and the American car industry.
But Cuomo has pledged that “The investigation will
continue until we have unearthed all aspects of this scheme.”
As he is both a tenacious– and ambitious investigator,
he will undoubtedly topple more dominoes as he proceeds
up the food chain . But will he break the matrix of corruption?
Stay tuned.
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