Cuomo Secures Agreements With Four Leading Private Equity Firms To Adopt Code Of Conduct And Eliminate Pay-to-play In Public Pension Funds Nationwide

NEW YORK, N.Y. (September 17, 2009) - Attorney General Andrew M. Cuomo today announced that four leading private equity firms, HM Capital Partners I (“HM Capital”), Levine Leichtman Capital Partners (“Levine Leichtman”), Access Capital Partners (“Access”), and Falconhead Capital (“Falconhead”) have adopted Cuomo’s Public Pension Fund Reform Code of Conduct to reform the public pension fund system and to end pay-to-play practices nationwide. Under the terms of the agreements announced today, the firms will return over $4.5 million associated with New York State Common Retirement Fund (“CRF”) investments. These funds will be returned to the CRF for the benefit of the pension holders.

“With seven firms now having signed our Code of Conduct, momentum is building in the industry to make our Code the national standard to eliminate pay-to-play in public pension funds across the country,” said Attorney General Cuomo. “By signing on today, these four firms have shown their leadership in the alternative investment community. Today’s announcement demonstrates that our reform agenda continues to ripple across the industry, and represents an important next step in ridding public pension funds of corruption and conflicts of interest.”

Attorney General Cuomo’s Code of Conduct bans investment firms from hiring, utilizing, or compensating placement agents, lobbyists, or other third-party intermediaries to communicate or interact with public pension funds to obtain investments. To avoid pay-to-play schemes, the Code prohibits investment firms (and their principals, agents, employees and family members) from doing business with a public pension fund for two years after the firm makes a campaign contribution to an elected or appointed official who can influence the fund's investment decisions. This provision also bars all firms currently doing business with the pension fund from making such campaign contributions. Investment firms must also disclose any conflicts of interest to public pension fund officials or law enforcement authorities, to increase transparency and avoid abuse in the management of public pension funds.

Of the firms signing today, two of them, HM Capital and Falconhead, hired Henry (“Hank”) Morris, the chief political aide to then-Comptroller Alan Hevesi, through his broker-dealer to obtain CRF investments. Both Levine Leichtman and Access hired finders who split fees with Morris unbeknownst to Levine Leichtman or Access.

HM Capital and Falconhead

HM Capital and Falconhead each agreed to pay Hank Morris through Searle & Co. (“Searle”), the broker/dealer with which Morris was affiliated, to obtain investments from the CRF. Morris, with Loglisci’s assistance, secured an investment for HM Capital in its Sector Performance Fund of more than $70 million from the CRF. Similarly, Morris secured indirect investments for Falconhead through Aldus Equity’s CRF-seeded fund-of-funds (“Aldus”), totaling approximately $30 million. HM Capital paid fees to Searle on the Sector Performance Fund investment, of which Morris pocketed the vast majority. HM Capital ceased paying Searle in 2007 after this investigation became public. Searle’s fees for the Falconhead transaction were not due until 2006; by this time, Alan Hevesi was under investigation for the improper use of state drivers. Searle did not invoice Falconhead, and Falconhead did not pay Searle.

Levine Leichtman

Levine Leichtman retained Wetherly Capital Group (“Wetherly”), a Los Angeles-based broker/dealer, as a placement agent for the CRF. The agreement required Wetherly to obtain approval before engaging any sub-finders. However, in violation of this agreement, Wetherly agreed to pay Hank Morris through a sub-finder agreement with Searle, whereby Searle would receive 40 percent of any placement fees that Wetherly obtained on any CRF investment with Levine Leichtman. Ultimately, the CRF indirectly invested $20 million with Levine Leichtman through Aldus. Levine Leichtman paid Wetherly a one percent placement fee on the investment. Wetherly, without informing Levine Leichtman, paid Searle 40 percent of its fee, of which Searle passed on 95 percent to Morris.


Access hired Barrett Wissman through one of his companies as a finder for the CRF. Wissman represented that he would not engage or pay third parties on this transaction. Wissman agreed in writing to obtain Access’s approval before engaging any sub-finder. However, Wissman secretly agreed to pay Morris 45 percent of any fees he might earn on a CRF investment with Access. Ultimately, the CRF committed 500 million Euros (worth over $700 million at today’s exchange rate) to Access. Unbeknownst to Access, Wissman arranged to provide 45 percent of the fees to Morris. In consultation with the CRF, Access stopped paying Wissman in January 2008. In 2009, Wissman pled guilty to Martin Act securities fraud charges partly in connection with his misrepresentations to Access.

All four of these transactions are alleged as the basis for Martin Act and other charges in the 123-count indictment returned by the grand jury and filed by Cuomo’s office in March against Morris and Loglisci. Attorney General Cuomo’s investigation into corruption at the CRF has led to a number of criminal charges to date, including charges against former Liberal Party Chair Ray Harding, and investment advisor Saul Meyer, who has been charged in connection with the Aldus-related transactions. Hedge Fund Manager Barrett Wissman as well as Julio Ramirez, an unlicensed placement agent associated with Wetherly Capital, have pled guilty to Martin Act securities fraud charges for conduct related to the pension fund. Morris, Loglisci, Meyer, and Harding are presumed innocent until they are proven guilty in court.

Under today’s agreements, the four firms have adopted the Code of Conduct and have agreed to return over $4.5 million in proceeds associated with these transactions: HM Capital will pay $1.56 million, Falconhead will pay $1.3 million, Levine Leichtman will turn over $200,000 that it has recovered from its former placement agent, and Access will return approximately $1.6 million in fees that it withheld from Wissman.

HM Capital said: “Private equity is a valuable asset class for public pension funds. We entered into this agreement as part of our longstanding commitment to greater public transparency with regard to how these pension funds are invested, and because we join the Attorney General in believing that openness and honesty in the management of these funds is of critical importance both to the public and to the private equity industry.”

Levine Leichtman said: “We endorse the Attorney General's efforts to reform the public pension fund investment process and bring stronger standards of accountability and transparency to the private equity industry. To that end, we are pleased to adopt the Attorney General's Code of Conduct, and to turn over $200,000 that we have recovered from our former placement agent for the benefit of the CRF and its members.”

Access said: “Access has always sought to provide its clients with the highest quality of service in its capacity as an investment advisor, and as a fiduciary to its investors. Accordingly, Access is pleased to adopt the Attorney General's Code of Conduct today, which provides for greater transparency and accountability for private equity firms that solicit investments from public pension funds."

Falconhead Capital said: “Falconhead Capital has always been committed to openness and transparency, and it is with those goals in mind that we enter into this agreement today. We are pleased to be among the first firms to participate in this reform effort.”

The Attorney General’s Public Pension Fund Reform Code of Conduct:

  • Bans Placement Agents: Investment firms are prohibited from using Placement Agents, Lobbyists, or any other third-party intermediary to communicate or interact with Public Pension Funds for any purpose. The prohibition does not apply to the use of consultants and investment banks to otherwise directly assist investment firms by, for example, preparing marketing materials or performing due diligence;
  • Bans "Pay to Play": Prohibits investment firms (and their principals, agents, employees and family members) from doing business with a public pension fund for two years after the firm makes a campaign contribution to any elected or appointed official who can influence a public pension fund's investment decisions. The prohibition also applies to candidates for such positions, but does not apply to contributions of $300.00 or less to elected officials or candidates for whom the person making the contribution can vote;
  • Increases Transparency: Requires rigorous, ongoing disclosure of information relating to campaign contributions, the identities, responsibilities and qualifications of investment fund personnel and any payments by investment firms to third-parties in connection with public pension fund matters. Also requires investment firms to promptly publish such information on their Web sites;
  • Imposes Higher Standard of Conduct: Holds investment firms to a higher, standard of conduct that avoids even the appearance of impropriety. The Code prohibits (1) improper relationships between pension fund officials and an investment firm's personnel or agents, (2) “revolving door” employment by investment firms of former public pension fund officials and employees, and (3) improper gifts by investment firms to public pension fund employees and officials;
  • Enhances Conflicts of Interest Policies: Investment firms are required to promptly disclose and cure any actual, potential and apparent conflicts of interest to public pension fund officials or law enforcement authorities where appropriate.
  • Ensures Ongoing Compliance: Investment firms must certify annually to the Office of the Attorney General (and any public pension fund that asks) that they are in compliance with the Code of Conduct. Violations of the Code constitute grounds for either termination of an existing investment, disqualification from doing further business with the public pension fund for up to ten years, or both.

In July, the Securities & Exchange Commission proposed new pay-to-play rules that would institutionalize Cuomo’s Code of Conduct nationwide.

Cuomo also issued subpoenas in May to over 100 investment firms and their agents after his investigation found that 40 to 50 percent of agents obtaining investments from New York pension funds were unregistered.

The investigation is being conducted by Stacy Aronowitz, Deputy Chief of the Public Integrity Bureau, and Assistant Attorneys General Emily Bradford, Rachel Doft, Noah Falk, and Amy Tully, under the supervision of Ellen Nachtigall Biben, Special Deputy Attorney General for Public Integrity, and Linda A. Lacewell, Special Counsel, and with the assistance of Richard Jackson, Assistant Solicitor General.


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