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$20 Million Settlement Sets New Ethic in Pension Deals

New York State Attorney General Andrew M. Cuomo speaks at a press conference on May 5, 2008 in New York City. (Brad Barket/Getty Images)Twenty million dollars. That's what it cost the Carlyle Group to extricate itself from the growing investigation into corruption at the state pension funds in New York, according to a settlement announced yesterday by state Attorney General Andrew Cuomo.

That’s a good chunk of change, and the agreement also attaches substantial strings. Carlyle -- which has not been shy about flaunting political connections to get deals done -- has agreed to stop paying middlemen, called "placement agents," to help it get billions in investments from pension systems around the country.

Cuomo says he hopes the settlement, which also puts limits on Carlyle's political contributions, will become a model for cleaning up the lucrative business of investing public employees' money.

The settlement hints at what might be next for nearly 20 other firms mentioned in a March indictment laying out charges of corruption at the $122 billion New York state pension fund. The indictment alleges that New York political consultant Hank Morris and an accomplice in the state comptroller's office committed multiple fraudulent transactions related to the firms' deals with the state, but does not allege that the firms themselves engaged in criminal conduct.

Prominent among them is Quadrangle Group, which was run by Steven Rattner, who is now one of President Obama's auto-industry advisers. Quadrangle is alleged to have agreed to pay Morris' firm a "finder's fee" of 1.1 percent of any investment from the pension fund. Rattner's firm also paid $89,000 to help Morris' accomplice, David Loglisci, finance a film called "Chooch," according to the Securities and Exchange Commission. Loglisci told Quadrangle that the state would invest $100 million in their firm shortly after the film financing was arranged, according to the SEC complaint.

Quadrangle says it did nothing wrong and is cooperating with investigators.

Wetherly Capital Group also has not been charged, but the politically-connected California firm is known to have split fees with Morris. Wetherly's clients, Freeman Spogli Equity Partners and Ares, are also named but have not been charged. The firms have not returned calls for comment.

Another firm, London-based Lion Capital, is associated with eight checks totaling $1.6 million that passed through Morris’ affiliated companies, according to the indictment, which alleges they were used to launder money that “represented the proceeds of criminal conduct.”

One other firm named in the Morris indictment seems a likely prospect for a settlement: GKM Ventures. Cuomo's office has tracked down checks totaling $440,000 that it says were used to launder money to Morris in relation to GKM. The firm, headquartered in Los Angeles, did not return a call for comment Friday.

In 2006, a range of investors, including Harvard University and several public pension funds, yanked money out of a firm in which GKM had invested -- ITU Ventures. ITU had been soliciting campaign contributions for politicians with power to influence pension fund decisions, such as former California Controller Steve Westly, who sat on the boards of that state's biggest pension funds. ITU did not immediately return our call.

The fine agreed to by Carlyle represents almost half the $42 million in fees that the firm has earned since 2004. Carlyle still manages $1.5 billion for the New York state retirement system, but a spokesman for Comptroller Thomas P. DiNapoli said the state is assessing its legal rights and obligations for all contracts concluded while the alleged kickback scheme was operating, and that "all options are on the table."

Carlyle has said it is cooperating with an ongoing investigation by the SEC.

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