Funds scurrying to cut off future pay-to-play action |
Date: Tuesday, May 5, 2009
Author: Arleen Jacobius, pionline.com
The placement-agent payment scandal has gone west.
Public pension fund executives from Oklahoma to Washington state are probing their managers' relationships with third-party marketers and placement agents as a result of the pay-to-play scandal in New York.
Public plans nationwide are doing everything from banning placement agents to beefing up disclosure policies that now will include third-party marketers used by investment managers and consultants. A number of plans are going further, investigating relationships between consultants and alternative investment managers named but not charged in the New York criminal indictments.
So far, three people have been charged by New York State Attorney General Andrew Cuomo: Henry Morris, a political consultant and fundraiser for Alan Hevesi, the former state comptroller; David Loglisci, former chief investment officer of the $122 billion New York State Common Retirement Fund; and Saul M. Meyer, founding principal and managing partner of private equity consultant and funds-of-funds manager Aldus Equity Partners.
Separately, the Securities and Exchange Commission last month filed an amended complaint naming Aldus Equity Partners LP.
In essence, both the SEC complaint and the New York indictments allege that Messrs. Morris,. Loglisci and Meyers, through investment firms controlled by Messrs. Morris and Meyers, extracted kickbacks from alternative investment managers in exchange for investment commitments by the New York state fund.
Consultants and managers mentioned, but not charged, in the SEC complaint and New York indictments, comprise a “who's who” of alternative investment firms frequently used by the largest public pension funds, including private equity firm Pacific Corporate Group and Carlyle Group.
The New York state charges against Messrs. Morris and Loglisci allege that a PCG managing director helped create a co-investment vehicle with hedge fund manager Clinton Group Inc. — at the suggestion of Messrs. Morris and Loglisci — solely for the giant New York state pension fund, allegedly giving Mr. Morris and Barrett W. Wissman, a Dallas-based hedge fund manager, a free 10% ownership in the new fund. (Mr. Wissman has pleaded guilty.)
Although the PCG executive was not identified in the indictments, Stephen Moseley left his post at PCG Capital Partners, PCG's investment management arm, in September 2006. A month later the New York State fund committed $750 million to the new co-investment vehicle and in December 2006 Mr. Moseley went to work as the managing director for Estes Management LLC, a private equity subsidiary of Clinton Group to run the fund's day-to-day operations. Last year, Mr. Moseley joined three other former PCG colleagues at StepStone Group LLC.
Mr. Moseley declined to comment. Monte Brem, CEO of StepStone declined to talk about the SEC complaint and New York indictments.
David Fann, president and CEO at PCG Asset Management LLC, PCG's consulting arm, said “to the extent PCG is mentioned in connection with either matter, PCG was a victim of the alleged bad action by others identified in the indictment and complaint, and the actions taken by the individuals ... were completely unknown to PCG.”
Carlyle spokesman Christopher Ullman would say only that firm officials are cooperating with the investigations and are no longer using placement agents.
Ripples nationwide
The turmoil in New York is causing ripples across the country. The FBI is questioning officials at two pension funds in New Mexico — the $11.8 billion New Mexico Investment Council and the $6.5 billion New Mexico Educational Retirement Board — about Aldus Equity.
Also, the SEC is investigating two Los Angeles Fire & Police Pension System board members — Sean Harrigan, a former chair of the California Public Employees' Retirement System, and Elliott Broidy, co-founder and chairman of private equity manager Markstone Capital Management — regarding possible connections with and payment from placement agents, sources said.
The SEC also has requested documents from consultant Pension Consulting Alliance Inc., sources said. Michael Moy, managing director at PCA, declined comment.
In addition, the $7 billion Oklahoma Teachers' Retirement System, Oklahoma City, placed Aldus Equity — already was on watch because of a personnel change in January — on a more severe level of the system's four-tier watch system, pending an investigation by the system consultant and staff, said James R. Wilbanks, executive secretary of the system. Aldus manages $450 million in a private equity fund of funds for the pension fund.
On April 22, trustees of the Fort Worth (Texas) Employees' Retirement Fund voted to terminate Aldus, which had received $30 million in commitments and investments from the $1.3 billion fund, said Ruth Ryerson, executive director and CIO.
After the SEC filed its most recently amended complaint on April 30, Aldus Equity was terminated by the New Mexico Investment Council and suspended by New Mexico Educational. Executives of the Santa Fe-based funds also are reviewing investments made as a result of Aldus' recommendations.
Last week, the New Mexico Investment Council temporarily halted further alternative investment commitments until it adopts policies and procedures on placement agent disclosures, which are expected to come before the council at a May 26 meeting, said Charles Wollmann, public information officer.
The New Mexico Educational Board also stopped negotiations on private equity commitments without final contracts, said Bob Jacksha, the fund's CIO. The board is expected to decide whether to terminate Aldus at its meeting June 26, but might call a special meeting before then, Mr. Jacksha said.
The board of the $9.5 billion Los Angeles Fire and Police Pension System directed PCA, its consultant, as well as staff and the Los Angeles City Attorney's Office, to investigate the fund's dealings with Aldus and StepStone, which it used as private equity consultants. Their findings will be considered by the board on May 7, said Michael Perez, general manager.
Meanwhile, many pension funds are considering requiring disclosure by managers and consultants on whether they use placement agents and how much those agents are paid.
“We are currently assisting a number of our clients in reviewing, and where appropriate enhancing, their policies related to marketing agent disclosures,” said Stepstone's Mr. Brem.
Sacramento-based CalPERS, with $175 billion in assets, is drafting a new placement agent disclosure policy, said spokesman Clark McKinley. Aldus is part of CalPERS' private equity external resource consultant pool, but the system has never used Aldus on a project, he said. A placement agent disclosure policy is expected to go before CalPERS' investment policy subcommittee on May 7 and the full investment committee as early as May 11.
The $111.6 billion California State Teachers Retirement System, Sacramento, already asks investment managers to reveal placement agents they use. In 2008, for example, only seven investment managers employed a placement agent, according to a list shared with Pensions & Investments.
The $67.6 billion Washington State Investment Board does not employ any consultant or manager cited in the complaints, said Theresa Whitmarsh, acting executive director of the Olympia-based fund. Finders' fees and campaign contributions by managers or employees of money management firms are strictly prohibited as a conflict of interest. “Washington has the strongest conflict of interest rules than any other investor that I am aware of,” Ms. Whitmarsh said.
Policy adopted
The Los Angeles City Employees Retirement System last week adopted a placement agent disclosure policy that requires managers to reveal the identity of placement agents or third-party marketers, but it won't ask about fees, said Sally Choi, general manager.
Also last week, the New York City Employees' Retirement System trustees banned the use of placement agents and third-party marketing agents for private equity investments, said Kristen McMann, spokeswoman for New York City Comptroller William C. Thompson Jr.
The city employees system, with assets of $30.3 billion as of Dec. 31, is the first of the five New York City pension funds to respond to Mr. Thompson's request to suspend the use of placement agents, she said.
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