May 15, 2009
Carlyle Settles With New York in Pension Case
By DANNY HAKIM
The Carlyle Group, one of the largest and most politically connected private equity firms, will pay $20 million and make broad changes to its practices to end an inquiry by New York’s state attorney general, Andrew M. Cuomo, into its pension business.
Under the deal, Carlyle will no longer use intermediaries, known as placement agents, to gain investment business from public pension funds nationwide, and it will curtail its campaign contributions to elected officials who oversee pension funds.
Carlyle executives and the firm will not face any further action, including criminal prosecution, by Mr. Cuomo’s office. Mr. Cuomo hopes to use the settlement as a model for an industrywide overhaul of how hedge funds and private equity firms interact with public pension funds.
In addition, the settlement could bring new urgency to the Securities and Exchange Commission’s deliberations about whether to bar investment firms and their executives from making campaign contributions to officials who oversee public pensions. Carlyle, which over the years has employed former President George H. W. Bush and a former British prime minister, John Major, manages $1.5 billion for the New York State pension fund, and is one of the fund’s largest outside investment managers.
Mr. Cuomo’s inquiry began in New York, but the agreement will apply to the firm’s business with all public pension funds nationwide. His office said the $20 million settlement was reached after considering Carlyle’s various pension deals and relative culpability. The company earns more than $13 million in annual fees from the New York pension fund.
“This is a revolutionary agreement,” Mr. Cuomo said Thursday. “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.”
Christopher W. Ullman, a Carlyle spokesman, said, “We are pleased to announce today that we have reached a successful resolution with the attorney general and strongly support his efforts to implement reforms that usher in a new era of transparency and accountability into the pension fund investment process.”
For two years, Mr. Cuomo’s office and the Securities and Exchange Commission have been conducting parallel investigations focused on the millions of dollars and other favors that friends, relatives and aides of a former state comptroller, Alan G. Hevesi, gained by acting as intermediaries between investment firms and officials at New York State’s $122 billion pension fund. New York’s comptroller is the sole trustee of the pension fund.
Payments to intermediaries can be illegal if they are essentially bribes or kickbacks disguised as legitimate payments.
Investigators have laid out what they have called a network of corruption from California to New York, in which billions of dollars of pension fund investments were handed out in exchange for kickbacks or other questionable payments.
Last month, The New York Times reported that investigators were reviewing whether Carlyle had made improper payments to intermediaries in exchange for being awarded lucrative pension fund investments.
For the measures agreed to by Carlyle and Mr. Cuomo to have broader impact across Wall Street, the S.E.C., Congress or state comptrollers would need to agree to impose them. John Nester, an S.E.C. spokesman, said the commission expected to propose new rules as early as July.
While the Carlyle agreement will prohibit the firm’s executives and their relatives from making campaign contributions to comptrollers or other officials charged with overseeing pension funds, there is an exception: Donations up to $300 will be allowed, so long as the donors can vote for the officials they are giving to and are not directing money to campaigns in faraway states, as investment executives have often done.
The deal also calls for Carlyle to disclose contributions made to other politicians in any state in which it does pension business.
Orin S. Kramer, a hedge fund manager who is chairman of the New Jersey State Investment Council, said Thursday that the agreement was a step in the right direction, but questioned an outright ban on intermediaries, saying, “There is an argument that one can preserve the valuable economic function of placement agents and have reforms that knock out political fixers.”
Mr. Cuomo had a different view. “If Boss Tweed were alive today,” he said, “he would be a placement agent.”
New York State’s comptroller, Thomas P. DiNapoli, praised Mr. Cuomo’s recommendations, noting that he had recently banned intermediaries from the state pension fund.
But Mr. DiNapoli’s own practices have influenced the new Cuomo policy and illustrated how difficult the pension business can be to regulate. In 2007, Fernando Ferrer, the former Bronx borough president, introduced Mr. DiNapoli to Alfred Villalobos, who runs Arvco Capital, a Nevada placement agency. Seven months later, an Arvco client landed a $10 million investment from the state pension fund. Mr. DiNapoli’s staff has said he was not aware that Mr. Ferrer was a paid consultant to Arvco, and the relationship was never disclosed.
Mr. Cuomo said Mr. Ferrer’s advocacy on behalf of Arvco would be banned under his guidelines, which bar intermediaries from “introducing, funding, referring, facilitating, arranging, expediting, fostering or establishing a relationship with or obtaining access to a pension fund.”
“I think we covered every base,” Mr. Cuomo said.
Mr. DiNapoli said in a statement that he had “taken a series of steps to reform the fund.” His staff said he was not available to be interviewed.
In a statement Thursday, Carlyle said it was suing Hank Morris, once a top Hevesi aide, and a firm Mr. Morris worked for, Searle & Company, seeking more than $15 million.
Mr. Morris was a placement agent on several Carlyle deals, including one involving an energy investment fund run by Carlyle and another firm, Riverstone Holdings. The firms paid $10 million to Searle, nearly half of which was secretly funneled to Mr. Morris, according to an S.E.C. complaint.
David M. Leuschen, a top Riverstone executive, also invested $100,000 in “Chooch,” a movie produced by a brother of a top aide to Mr. Hevesi, David Loglisci.
Carlyle’s pension practices have drawn scrutiny in a number of states. In Connecticut, Carlyle gained entree to the state pension fund in the 1990s by hiring a Washington lobbyist who offered the state treasurer, Paul J. Silvester, a lucrative job at the same time the men were discussing pension business. Carlyle was given tens of millions of dollars to manage, and Mr. Silvester got the job; he later went to jail after pleading guilty to federal racketeering and conspiracy charges.
In the Cuomo inquiry, Mr. Morris and Mr. Loglisci have been indicted on corruption-related fraud charges, and Raymond B. Harding, a former vice chairman of the state’s Liberal Party, has also been charged.