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“It
is unacceptable that a placement agent have any influence
in the investments of the state pension fund,"
– New York Governor David Paterson, April 22, 2009”
On March 29th 2009, Steven Rattner, President Obama’s
newly-appointed car czar, 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 a month after disposing
of Wagoner, Rattner may confronts a similar decision about
his own tenure.
Up until leaving Wall Street for Washington in, Rattner,
a 56-year-old former New York Times reporter, had a golden
career in investment banking, working first at Morgan Stanley,
then becoming a senior partner at Lazard Freres, and finally,
in 2000, co-founding his own firm, 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.
What brought Rattner into the investigative cross-hairs
was that he had employed Henry “Hank” Morris,
a top advisor for then-New York State Comptroller Alan Hevesi
to act as its placement agent, who, 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 so called
pay For play 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 its subsidiary
buy DVD rights to movie that was co-produced by 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 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 distributor 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 CarlyleRiverstrone
Fund, a joint venture of the Carlysle 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 office investigating these charges,
and with Morris and Loglisci due to go on trial in New York,
Rattner needs to weigh whether like Caesar's wife, he needs
to be above suspicion If so,just as he had the courage to
ask Wagoner to retire for the good of General Motors, he
might be prompted to consider the same course of action
for himself.
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