California Firm Split Fees With Figure in N.Y. Pension Scandal
A prominent Los Angeles investment firm shared fees from pension fund deals in New York and California with Hank Morris, the former political consultant under indictment (PDF) for selling access to New York’s $122 billion retirement fund, ProPublica has learned.
Investigators say they are focusing on the role of Wetherly Capital Group, which allegedly funneled $314,000 in checks to Morris through an intermediary firm he owned. Wetherly received up to $3 million in fees for one pension deal in New York, investigators say. In their indictment of Morris, authorities described the checks from Wetherly as “proceeds of criminal conduct.”
Although mentioned in the Morris indictment, Wetherly has not been accused of any crime. The firm, founded in 2001 by Daniel N. Weinstein, a prominent Democratic fundraiser in California and former union political operative there, did not return calls seeking comment.
Wetherly and the firm with which Morris was affiliated, Searle & Co., also have shared fees for helping a private equity firm seal three multimillion dollar deals with California funds, ProPublica has learned. The funds are the California Public Employees’ Retirement System—the nation’s biggest pension fund—the California State Teachers’ Retirement System, and the Los Angeles Fire and Police Pensions.
Until now, the spotlight in the two-year-old investigation by New York Attorney General Andrew Cuomo’s office has been mainly on Morris’ deals in New York. Existence of a relationship between Morris and Wetherly involving California pension funds hadn’t been disclosed. Investigators said that while all of Morris’ activities are of interest, the California pension funds are not under scrutiny.
Wetherly has represented 10 companies that have won a collective $300 million in investments from CalPERS, records show. The company was a “placement agent” in those deals, essentially acting as a middleman on behalf of private-equity firms that sought business handling the pension fund’s money.
Placement agents typically collect 1 percent to 2 percent of the value of any investment that results. Fees are paid by the investment firms they represent, not the pension funds, and typically aren’t disclosed.
The New York pay-to-play investigation is among a string of recent corruption cases involving placement agents in other states. On Wednesday, New York state Comptroller Thomas P. DiNapoli banned placement agents from deals involving the pension fund, which his office oversees. Comptroller William C. Thompson Jr. proposed a similar prohibition over New York City’s $83 billion in pension accounts.
CalPERS said there’s no prohibition against private-equity firms using placement agents to win business with the pension fund. “In the pension fund industry, placement agents are used for some investments, and for some they’re not,” said Pat Macht, head of public affairs at CalPERS. “We don’t get in between the relationship with a fund and whoever they use to market those funds. So it’s kind of irrelevant to us.”
Unlike several other large funds, including the California State Teachers’ Retirement System, CalPERS does not have a policy or guidelines on how firms must report their use of placement agents and the fees paid to them or on what records must kept by the funds.
“The only thing we follow is state disclosure laws, but they aren’t specific to placement agents,” said Macht. CalPERS was unaware of any relationship between Wetherly and Morris until informed by ProPublica, Macht said.
Wetherly’s ties to another California fund, the Los Angeles City Employees’ Retirement System, extended beyond promoting its clients. Vicky L. Schiff, a Wetherly director, sat on the LACERS board at the same time the system considered a $10 million investment with a Wetherly client, Palladium Equity Partners, according to public records and interviews with LACERS staff.
Schiff’s potential conflict of interest was noted in a September 2004 memorandum from the Los Angeles City Ethics Commission. The memo listed a number of city appointees with possible “economic interests” related to their city posts. Schiff had disclosed her interest in Wetherly, as well as several other real estate and political consulting companies, but the memo noted that she had received a “cautionary letter—noting potential conflicts.”
On Jan. 25, 2005, the LACERS board approved the Palladium placement. “Commissioner Schiff recused herself from participation and left the room during the vote,” board spokeswoman Linda Aparicio said.
Schiff resigned from the board two months later, Aparicio said. The following two years, Wetherly clients received another $30 million in commitments from LACERS. The California State Teachers’ Retirement Fund has also invested with three Wetherly clients since 2004, records show.
Weinstein, the firm’s founder, has a record of political involvement in California dating to his days as political director of the United Food and Commercial Workers union in the early 1990s.
Weinstein has worked as a fundraiser for former California Governor Gray Davis and in 2001 raised money for Los Angeles City Attorney James K. Hahn’s winning mayoral campaign. At the time, Hahn’s rival, now-Mayor Antonio Villaraigosa, accused Weinstein of orchestrating a smear campaign. Wetherly’s clients include Democratic Party fundraiser Ron Burkle, founder of Yucaipa Companies, a private-equity firm that retained former President Bill Clinton as a board member until late 2007.
Weinstein and Wetherly have made political contributions to candidates and political committees in both California and New York.
In California, Wetherly has contributed nearly $230,000 since the firm opened in 2001. Of that, $56,000 went to CalPERS board members or candidates for positions such as state controller or treasurer with a seat on the board. Wetherly also gave $35,000 to the United Food and Commercial Workers. Sean Harrigan, a UFCW union official, chaired the CalPERS board from late 2001 until early 2005.
According to the New York City campaign finance data, Wetherly and its clients have given $50,000 to city Comptroller Thompson since 2005. Thompson sits on the boards of the five New York City pension funds. He is also the leading Democratic candidate for New York City mayor. His office did not return calls and emails for comment.
DiNapoli, the state comptroller, also received a $2,500 contribution from Wetherly in January. The donation came seven months after a Wetherly client, Levine Leichtman Capital Partners of Los Angeles, won a $50 million commitment from the fund, records show. A DiNapoli spokesman said the donation has since been returned because it violated the comptroller’s personal ethics standards and that DiNapoli’s office was not aware of Wetherly’s connection to the corruption scandal “until their name showed up” in the indictment. Levine Leichtman declined comment.
DiNapoli replaced former New York State Comptroller Alan Hevesi, who resigned in 2007. Hevesi, who had employed Morris as his campaign manager, has not been charged. The March indictment accuses Morris and David Loglisci, the former deputy comptroller under Hevesi, of bribery, money laundering, securities fraud and other crimes. Investigators allege that Morris raised millions of dollars in campaign contributions for Hevesi in return for lucrative business with the pension fund.
Many major banks and financial institutions offer placement services as part of their business, among them Citigroup, Credit Suisse, and Deloitte & Touche. On its Web site, for example, Credit Suisse says its placement services provide “access to high-quality private and strategic investors.”
Defenders say the placement agents offer valuable marketing assistance, but critics say they operate in a shadowy world that is prone to corruption.
After a scandal involving placement agents at the Illinois Teachers’ Retirement System, the state introduced new rules meant to improve transparency and accountability at the funds, said Bill Atwood, executive director of the Illinois State Board of Investments.
“There’s a troubling appearance where some guy, by whatever relationships, was able to facilitate very sizable investments being made from a public pension fund to an investment he had an interest in,” he said. “So regardless of the legality, the appearance is not good.”
H. Carl McCall, who preceded Hevesi as New York State comptroller, had many dealings with placement agents. Some added value to the process, he said, but others did not.
“There were some people who did this not because of their knowledge of the investment world but simply because they had contacts in the public pension fund world,” he said. “And they used those contacts.”
ProPublica intern Olga Pierce contributed reporting to this story.