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Post date: February 8 2010

Attorney General Andrew M. Cuomo Secures Agreements With Two Major Investment Firms In Ongoing New York State Pension Fund Investigation

NEW YORK, NY (February 8, 2010) – Attorney General Andrew M. Cuomo today announced agreements with Israeli venture capital firm Markstone Capital Group LLC (“Markstone”), and California-based placement agent firm Wetherly Capital Group LLC and its broker-dealer DAV/Wetherly Financial (“Wetherly”) to resolve their roles in Cuomo’s investigation into pay-to-play practices involving the New York State Common Retirement Fund (“CRF”). 

Both firms will adopt Cuomo’s Public Pension Fund Reform Code of Conduct.  Markstone will return $18 million to the CRF and Wetherly will return $1 million associated with CRF investments. Wetherly has also agreed to exit the placement agent business.

“Markstone and Wetherly are the eighth and ninth firms to adopt our Code of Conduct, which ends pay-to-play political contributions and the selling of access to public pension money nationwide,” said Attorney General Cuomo. “New York’s taxpayers deserve rigorous protection against political influence in our public pension funds. I commend these firms for furthering our reform efforts and returning a combined $19 million to the state pension fund through our agreements.”

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.

Markstone

Beginning in November 2002, Markstone founding partner Elliott Broidy gave gifts, political contributions, and other benefits valued in excess of $1 million, to top decision-makers at the CRF, as well as their friends and family members, with the intent to influence Office of the State Comptroller officials to invest in Markstone Capital Partners, L.P., Markstone’s first private equity fund. Ultimately, Markstone was awarded a $200 million investment by the CRF, which was subsequently increased to $225 million and finally to $250 million. Markstone received approximately $18 million in management fees from the CRF associated with its investment.

In December 2009, Broidy resigned his management position at Markstone and pled guilty to a felony charge of rewarding official misconduct, pursuant to a plea and cooperation agreement with the Attorney General’s office. 

Ambassador Dan Gillerman, Chairman of Markstone stated, “Markstone is pleased that we have reached an agreement with the Attorney General today. This enables us to move forward with our core business, investments in Israeli companies, which has generated strong returns since the fund’s inception. We support the Attorney General’s effort and will adopt the Attorney General’s Code of Conduct. Markstone is committed to the highest ethical standards and to transparency in fundraising. In addition, this code provides strong controls and constitutes an essential element in making us a stronger company for the years to come. We are proud of our work investing in Israel, which is a thriving market in the midst of a volatile global environment. We aim to continue providing our investors with substantial returns through active ownership.”

Wetherly

Wetherly represented three California-based private equity firms before the CRF: Ares Management LLC (“Ares”); Freeman Spogli & Co. (“Freeman Spogli”); and Levine Leichtman Capital Partners (“Levine Leichtman”). Wetherly agreed to introduce these firms to the CRF in exchange for placement fees in the form of a percentage of the CRF’s investments. In each instance, Wetherly split its placement fees with Henry “Hank” Morris, then-Comptroller Alan Hevesi’s paid political adviser. The three private equity firms were not informed about Wetherly’s arrangement with Morris. 

In all, the three private equity firms paid Wetherly in excess of $1.3 million in placement fees. Wetherly paid approximately $140,000 of this amount to unlicensed placement agent Julio Ramirez, Jr., who had secured the relationship with Morris, and approximately $500,000 to Morris himself, leaving Wetherly with approximately $660,000.

In May 2009, Ramirez pled guilty to a securities fraud charge under the Martin Act, pursuant to a plea and cooperation agreement with the Attorney General’s office. 

Wetherly-Related Investments

In December 2003, the CRF committed $50 million to Ares. Subsequently, Ares paid $637,500 in placement fees to Wetherly, of which Wetherly paid $225,000 to Morris.  In January 2004, the CRF committed $50 million to Freeman Spogli. Subsequently, Freeman Spogli paid Wetherly $500,000 in placement fees, of which Wetherly paid $200,000 to Morris.

In March 2005, the CRF indirectly invested $20 million with Levine Leichtman through Aldus Equity. Levine Leichtman then paid Wetherly $200,000 in placement fees. Subsequently, Wetherly paid Searle & Co. (“Searle”), the broker-dealer with which Morris was affiliated at that time, forty percent of its fee, of which Searle passed on ninety-five percent to Morris.

In September 2009, the Attorney General announced an agreement to resolve Levine Leichtman’s role in the investigation.

A Wetherly spokesperson said:  “The principals at Wetherly Capital embrace and endorse the Attorney General's reforms and continue to support all efforts to increase transparency in the solicitation of investments from public pension funds.  Throughout this entire investigation, Wetherly and its principals have cooperated fully and voluntarily with the Attorney General and his staff.  To that end, Wetherly has agreed to return $1 million in proceeds from previous transactions to the New York Common Retirement Fund.  With that, we are very pleased to have this matter resolved.”  

Today’s announcement brings to nine the number of investment firms that have signed the Attorney General’s Public Pension Fund Reform Code of Conduct.  In addition to Markstone and Wetherly, those firms are: The Carlyle Group; Riverstone Holdings LLC; Pacific Corporate Group Holdings, LLC; HM Capital Partners I; Levine Leichtman Capital Partners; Access Capital Partners; and Falconhead Capital.

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 websites;
  • 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.

Attorney General Cuomo’s investigation with respect to the CRF has led to a number of criminal charges to date, including charges against Morris and former CRF Chief Investment Officer David Loglisci, former Liberal Party Chair Raymond B. Harding, and investment advisor Saul Meyer. Meyer, Harding, hedge fund manager Barrett Wissman, and unlicensed placement agent Julio Ramirez, Jr. have pled guilty to Martin Act securities fraud charges for conduct related to the pension fund. Morris and Loglisci are presumed innocent until they are proven guilty in court. As noted above, Elliott Broidy has pled guilty to a felony charge of rewarding official misconduct.

With today’s announcement, nine investment firms have now agreed to return approximately $90 million to the CRF. Payments from individuals bring that total to over $120 million for the CRF and the State. Cuomo also issued subpoenas in May 2009 to investment firms and their agents after his investigation found that forty to fifty 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 to the Attorney General, and with the assistance of Richard Jackson, Assistant Solicitor General.

 

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