New charges against a well-connected private equity fund and a top New York political consulting firm raise a curtain on perhaps the most lucrative — and seedy — aspect of the business of American politics, the management of billions of dollars in state pension funds.
The scandal that erupted in the office of former New York State Comptroller Alan Hevesi is a study in contrasts: High flying private equity titans, allegedly caught with their hands in the pockets of teachers, clerks, and sanitation workers. Top politicians whose salaries are stuck in the low six-figures, suddenly in control of pots of money running into the twelve-figures. And top Democratic donors who cast themselves as high-minded, disinterested dabblers in the public good are revealed to have quite a bit of interest after all.
"We've gone from public contracts for buildings to underwriting to now controlling pension funds," said Mitchell Moss, a professor of urban planning at New York University, describing the recent evolution of political corruption. "The state pension funds have become the new honey pot."
The announcements made Thursday by New York State Attorney General Andrew Cuomo and the Securities and Exchange Commission constituted some of the largest settlements in decades of prosecutions in pension scandals, with the Quadrangle Group - a firm founded by the Democratic mega-donor and former Obama "auto czar" Steven Rattner - paying out $12 million in fines.
The Global Strategy Group, a top polling and consulting firm whose clients have included former Governor Eliot Sptizer and Cuomo himself, paid $2 million for allegedly helping to steer money to private equity clients.
The firms paid without admitting guilt, and Rattner - no longer with Quadrangle - continues to fight the charges, though he does not deny having financed a direct-to-DVD film called "Chooch" whose sole distinction was that its producer's brother was a key official in the pension fund.
In a conference call with reporters, Cuomo cast the "kickback scheme" as almost routine.
"Everyone does it, everyone knows about it and no one's done anything about it," Cuomo said in a conference call with reporters. "Well, that is changing."
In a rolling series of prosecutions, Cuomo has alleged that Hevesi's office favored political connections over financial savvy in selecting managers for billions in state funds, cheating pensioners and rewarding cronies. Cuomo charges that Hevesi gave favored access to fund managers who paid a fee to his longtime political guru, Hank Morris, who has been indicted for hiring himself out as a "placement agent" to the firms.
Those charged have included the state funds' chief investment officer, David Loglisci, who is now cooperating with investigators in a prosecution that appears aimed at Hevesi himself. Cuomo has already charged several fund managers and other New York politicos, including the former chairman of the once-influential Liberal Party, for playing a role in the corruption. Cuomo is now pushing a law to bar some of the practices, including the use of placement agents, from the pension fund system.
The New York scandal comes in a familiar form. A decade ago, Connecticut's Republican State Treasurer, Paul Silvester, was jailed over similar charges. A series of similar recent scandals have triggered investigations into pension funds in California, New Mexico, and elsewhere. Tom Daschle had to withdraw his cabinet nomination in part because he didn't pay taxes on a car service provided by a private equity firm.
The point of relationships with politicians from Daschle to former Senator Chuck Hagel and former President Bill Clinton, both employed at times by private equity firms, is often left hazy, and politicians typically cast them as high-minded policy advisory roles.
But industry observers say that part of their role is often using political connections to tap into the giant retirement funds controlled by states, municipalities, and unions, whose holdings dwarf the wealth of even the richest individuals.
"The general idea which is that you've got private equity firms that have effectively paid for access to get fund commitments out of state pensions, and we've seen that everywhere, it's just been harder to prove," said Dan Primack, the editor of PeHub, a private equity industry publication..
"In the case of New York the corruption is a lot more brazen," he said. "What you're seeing in states like California is more wink-wink stuff."
Politics and fund management cross paths in different ways. Many fund managers simply give - perfectly legal -- money to the campaigns of the state officials who manage money, whose filings often read like a roster of high financiers.
North Carolina State Treasurer Janet Cowell, for instance, received a combined $4,500 from two partners in the high-gloss Washington, D.C. money manager Perseus, LLC in the fall of 2008: current State Department special envoy Richard Holbrooke and former Fannie Mae chairman James Johnson. As of the summer of 2008, nearly $52 million of North Carolina workers' retirement money was lodged in Perseus funds.
In New York City, the founder of the private equity giant Carlyle Group, David Rubenstein, contributed $4,950 to City Comptroller William Thompson's 2005 re-election campaign. Carlyle manages $55 million for the pension fund.
Others - again legally - employ well-connected former politicians who can open key doors. Perhaps the highest-profile employee of a fund manager was Clinton, who was hired by Ron Burkle's Yucaipa funds after the presidency. The funds received $200 million in investments from the New York state pension fund in 2002; ; The New York City pension fund, managed by a board led by an elected Comptroller, gave invested $360 million with Yucaipa in 2008.
Other arrangements walk a finer legal line, though even some of the accused in New York - notably Hevesi's former top political adviser, Morris - have argued that while the use of political connections to gain access to pension money may be unseemly, there's no law against it.
California investigations, for instance, have focused on reports that former state fund managers left the agency to start or join private firms - which instantly were given state business, a common practice across the industry. The New York investigation has focused on political fixers like Morris and the Global Strategy Group, which allegedly sold entrée for fund managers to the more than $125 billion under the control of the New York State Comptroller.
Global Strategy said in a statement that it was "pleased" by the agreement. "There is no finding that we violated any law, and we are pleased to resolve this matter," the statement said.
The most severe public damage, though, may be to the most glamorous of Democratic donors, who cast themselves for the last decade as public-spirited figures acting against their own self-interest to support Democratic policies that would cost them more in taxes.
Three of New York's highest-profile Democratic private equity titans have been caught up, to varying degrees, in the Hevesi scandal.
Third Point Capitol -- founded by the iconoclastic investory Daniel Loeb -- has reportedly been under investigation for hiring one of Hevesi's sons soon after the state placed millions with Third Point. Intermedia Advisers -- founded by Leo Hindery, the chairman of John Edwards campaign for president and sponsor of high-profile, left-leaning economic initiatives - is named as the client of the Global Strategy Group, which settled charges today.
A spokeswoman for Hindery declined to comment on the firm's mention in the charges today. A spokeswoman for Loeb didn't respond to a request for comment on the reported investigation.
The best known of them, though, is Rattner, who for a decade sat at the pinnacle of New York's Democratic establishment. His sprawling apartment across from the Metropolitan Museum hosted the most expensive fundraisers, and his name was mentioned occasionally as a possible Democratic Secretary of the Treasury.
Rattner's wife, Maureen White, was the Democratic Party's National Finance Chair, and New York Tmes publisher Arthur Sulzberger has been described as his best friend. Rattner advocated for Democratic causes, writing in BusinessWeek that "we don't need to become tax-code Robin Hoods, but we can be vigilant about tax plans -- like virtually all of President George W. Bush's -- that widen the gulf between haves and have-nots."
The allegations cast him as a reverse Robin Hood, taking advantage of those elite connections to take money from the middle class public retirees for the benefit of Quadrangle, which collected some $5 million in fees from the disputed investments. The details, described in detail in filings by Cuomo and the SEC, couldn't be further from the high-flying, Fifth Avenue image:
The narrative in the SEC's complaint begins with a December 2003 meeting between a Quadrangle executive - reported to be Rattner - and Morris, Hevesi's chief political consultant, to discuss managing state pension funds.
Morris told Rattner, the SEC complaint says, that a brother of former New York State chief investment officer David Loglisci was involved in producing "Chooch," a low-budget flop about a Queens man who lets down his softball team and flees to Mexico.
Morris specifically asked, the complaint charges, whether Rattner "could help Loglisci's brother obtain financing for the theatrical distribution of the film." Loglisci's brother then called with the same request, but the movie appears not to have been quite up to standard for theatrical release, and a year later he returned to Rattner, looking for helping getting a DVD distribution deal.
The complaint charges that Rattner called Loglisci to market him a new fund as he worked with his brother on the DVD deal, warning a skeptical executive at an entertainment company Quadrangle owned to treat the matter "carefully" to avoid souring the pension fund investment, and later calling Morris to ask directly whether Quadrangle's company "needs to distribute [the] video" in order to get the pension deal.
Rattner paid Morris a "finder's fee," the SEC alleges, and later "e-mailed Morris to advise him that [the Quadrangle-owned company] was moving forward with the deal to distribute the Chooch DVD, and approximately three weeks later, Loglisci personally informed the Quadrangle executive that the Retirement Fund would be making a $100 million investment in the Quadrangle fund."
Quadrangle reaped about $5 million in fees from the $100 million investment, which it agreed today to repay to the fund, along with penalties to the SEC and to New York State.
Quadrangle capped its settlement with a stinging statement that "We wholly disavow the conduct engaged in by Steve Rattner," which it described as "inappropriate, wrong, and unethical."
But Rattner has not settled the charges, and his lawyer, former Deputy Attorney General Jamie Gorelick, said in a statement that he "does not agree with the characterization of events released today, including those contained in Quadrangle's statement."
And Rattner retains his high-profile backers in the stratosphere of New York's nexus of money and media power. Mayor Michael Bloomberg, who is also the richest man in New York, recently shifted his personal fortune from Quadrangle to a new firm being established with Rattner's help.
"He's a friend whose advice the Mayor has and continues to take," said Bloomberg spokesman Stu Loeser.