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Post date: February 17 2010

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

NEW YORK, N.Y. (February 17, 2010) - Attorney General Andrew M. Cuomo today announced that two leading investment firms have agreed to adopt Cuomo’s Public Pension Fund Reform Code of Conduct, which eliminates placement agents and campaign contributions from the public pension fund system nationwide. Ares Management LLC (“Ares”) and Freeman Spogli & Co. (“Freeman Spogli”) bring to eleven the number of firms that have adopted the Code.

Today’s announcement arises out of Cuomo’s two-year ongoing investigation involving the New York State Common Retirement Fund (the “CRF”), last valued at $126 billion. The investigation focuses in part on the use of placement agents and other intermediaries who are paid for marketing investments to public pension funds. The investigation found that the use of intermediaries in the public pension funds unnecessarily exposes the pension system to risks of improper influence. Last year, the Attorney General introduced his Code of Conduct, which, among other things, eliminates placement agents and intermediaries from the public pension fund system.

“As more and more firms sign the Code of Conduct it is fast becoming the new industry standard. All firms doing business with the pension fund should abide by the Code so we can ensure that billions in taxpayer funds are protected from waste, fraud, and abuse," said Attorney General Cuomo. “By adopting the Code, Ares and Freeman Spogli
have shown their commitment to transparency, integrity, and reform in our nation’s public pension fund system.”

In addition to the placement agent ban, the Code bars investment firms 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. Investment firms must also disclose any conflicts of interest to public pension fund officials or law enforcement authorities, to increase transparency and avoid abuse of the fund for personal gain.

Both Ares and Freeman Spogli obtained investments from the CRF under then-Comptroller Alan Hevesi. Each firm separately retained Wetherly Capital Group LLC (“Wetherly”) as a placement agent. Subsequently, Wetherly agreed to split its fees with Henry “Hank” Morris who was then Hevesi’s paid political adviser. Ares and Freeman Spogli were not informed of Wetherly’s arrangement with Morris.

Ares

Through its relationship with a lobbyist, Ares retained Wetherly as a placement agent for the CRF. Ares agreed to pay Wetherly a placement fee in the form of a percentage of any investment made with Ares by the CRF. Wetherly agreed to pay Morris 40 percent of its fees on the CRF investment with Ares. In December 2003, the CRF committed $50 million to Ares. Subsequently, Ares paid $637,500 in placement fees to Wetherly. Wetherly then paid $225,000 to Morris. Ares was not informed of Wetherly’s payments to Morris.

Freeman Spogli

Freeman Spogli retained Wetherly as a placement agent for the CRF. Freeman Spogli agreed to pay Wetherly a placement fee in the form of a percentage of any investment made with Freeman Spogli by the CRF. Wetherly agreed to pay Morris 40 percent of any its fees on the CRF investment with Freeman Spogli. In January 2004, the CRF committed $50 million to Freeman Spogli. Subsequently, Freeman Spogli paid Wetherly $500,000 in placement fees. Wetherly then paid Morris $200,000. Freeman Spogli was not informed of Wetherly’s payments to Morris.

Ares said: “Ares endorses the Attorney General's effort to promote greater transparency in the public pension fund investment process. In furtherance of this effort, and in keeping with Ares’ goal of best practices in its business activities, Ares is pleased to adopt the Public Pension Fund Reform Code of Conduct.”

Freeman Spogli said: “We are pleased to endorse the Attorney General's efforts to bring greater transparency to the pension fund investment process by adopting his Public Pension Fund Reform Code of Conduct.”

Today’s announcement brings to eleven the number of investment firms that have signed the Attorney General’s Public Pension Fund Reform Code of Conduct. In addition to Ares and Freeman Spogli, 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, Falconhead Capital, Markstone Capital Group, and Wetherly Capital Group. 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. Elliott Broidy, a venture capital fund manager, pled guilty to charges of rewarding official misconduct arising from his role in the pension fund investigation. Morris and Loglisci are presumed innocent until they are proven guilty in court.

Last week, the Attorney General announced an agreement with Wetherly resolving its role in the investigation. Among other things, Wetherly will pay $1 million to the State of New York pursuant to that agreement. To date, nine investment firms have agreed to return over $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 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 to the Attorney General, and with the assistance of Richard Jackson, Assistant Solicitor General.

The agreements can be found online at:

www.ag.ny.gov/media_center/2010/feb/Freeman_Agreement.pdf

www.ag.ny.gov/media_center/2010/feb/Ares_Agreement.pdf

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