Scandal: Pension Fund Pay to Play

Hank Morris is escorted in handcuffs into Manhattan criminal court on March 19, 2009. (Louis Lanzano/AP Photo)

The SEC and New York Attorney General Andrew Cuomo are investigating allegations that investment firms made improper payments to politically connected middlemen in exchange for investments from New York’s $122 billion pension fund. The SEC’s investigation has apparently spread to a California fund, as well.

The probe puts a spotlight on so-called placement agents, who connect investment firms seeking money from pension funds with the pension staff and board members who make investment decisions. Paying fees to placement agents is not in and of itself illegal as long as the placement agency is providing some sort of tangible service, like help putting together pitch materials. But it’s an opaque system with a track record for ethical - and legal - breaches.

 In the case of New York’s pension fund, authorities allege that Hank Morris, the former state comptroller’s top political adviser, crossed that line in his role as placement agent. He and David Loglisci, the chief investment officer of the New York fund, allegedly orchestrated a pay-to-play scheme in which private-equity firms and hedge funds had to pay kickbacks to Morris’ firm and other associates in exchange for lucrative business with the pension fund. Lawyers for both Morris and Loglisci, who were indicted in March, have denied the accusations.

Morris allegedly began influencing the fund in 2003, after having helped Alan Hevesi become state comptroller, a position that oversees the pension fund. Hevesi resigned in late 2006, after pleading guilty to defrauding the government on an unrelated charge involving the use of a state official to chauffer his ill wife.

Between 2003 and 2008, Morris and his associates raked in millions of dollars in proceeds on more than twenty investments with the fund, according to the attorney general’s indictment. Although no investment firm has been accused of wrongdoing, the SEC says that investment managers “knew, or were at least reckless in not knowing” that the fees were improper. The SEC describes payments to Morris by at least nine firms, including Carlyle Group, the world’s second-largest private-equity firm. Carlyle recently said it would stop using placement agents in any U.S. pension deals.

A firm co-founded by Steven Rattner, now the head of President Obama’s auto task force, is also under scrutiny. Quadrangle reportedly paid Morris’ company, Searle & Co., to help it win investments not only from New York’s fund, but also pension funds in Los Angeles, New Mexico and New York City. Neither firm has been accused of any wrongdoing, and nor has Rattner.

And, as ProPublica first reported, California-based Wetherly Capital Group shared fees with Morris’ firm in two deals at the New York fund and three deals in California.

Essential Documents:

The indictment (PDF) and SEC complaint against Hank Morris and David Loglisci.

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