The Carlyle Group agreed not to use third-party intermediaries to obtain investment business from pension funds as part of a settlement in an ongoing pay-to-play investigation, New York Attorney General Andrew Cuomo announced Thursday.
The Carlyle Group, one of the worlds largest private-equity firms, agreed to pay the state $20 million and adopt a public pension code of conduct crafted by the attorney general’s office. The code bans investment firms from using third parties such as placement agents and lobbyists to help them get hired to manage investments for public pension funds. It also prohibits a firm — including principals, agents, and employees and their family members — from doing business with a public pension fund for two year after the firm makes campaign contributions to an official involved with the fund’s investments.
Cuomo has been investigating an alleged kickback scheme under which he said officials in former state Comptroller Alan Hevesi’s office used sham placement-agent payments to enrich themselves in return for investments.
“Our code of conduct will help eliminate the conflicts of interest and corruption inherent in a system that allows people to buy access to those holding the pension fund purse-strings,” said Cuomo in a press release. “By banning campaign contributions to those who have sway over pension funds and eliminating the third-party intermediaries that have become dens of corruption, we will ensure reform.”
Cuomo said that in 2003 the Carlyle Group retained Henry “Hank” Morris, a chief aide to Hevesi, to obtain investment business from the $120 billion New York State Common Retirement Fund. After retaining Morris, who Cuomo has since charged for his role in the alleged kickback scheme, Carlyle obtained commitments for investments totalling approximately $730 million for Carlyle and Carlyle/Riverstone funds.
The code of conduct applies to all of the Carlyle Group’s public pension business in the U.S.
“For the past two years, Carlyle has cooperated extensively and voluntarily with the New York Attorney General’s inquiry into the use of placement agents in regards to the New York Common Retirement Fund,” the Carlyle Group said in a statement. “We are pleased to announce today that we have reached a successful resolution with the Attorney General and strongly support his efforts to implement reforms that usher in a new era of transparency and accountability into the pension fund investment process. Carlyle will be the first company to adopt the New York Attorney General’s Code of Conduct and set a new standard for ethics in the industry.”
The Carlyle Group intends to file a $15 million suit against Morris and the firm Searle & Co. to which it paid about $13 million. Most of that $13 million was allegedly funneled to a shell company controlled by Morris.
“Carlyle disclosed its retention of Searle & Co. to NYCRF and was unaware of any improper conduct by Searle & Co. or Mr. Morris,” the statement said. “Carlyle was victimized by Hank Morris’s alleged web of deceit.”
New York State Comptroller Thomas DiNapoli, sole trustee of the state pension fund, lauded the agreement.
“The Attorney General’s investigation continues to peel away layer upon layer of Hevesi-era abuse and misconduct,” DiNapoli said in a press release. “Last month, we banned the use of any form of paid intermediaries in Fund investments. Last week, I urged the SEC to ban campaign contributions from investment professionals. Today, the Attorney General is taking those reforms nationwide. It’s a great next step.”
Christopher Ullman, a spokesman for The Carlyle Group, said that former Securities and Exchange Commission chairman Arthur Levitt, a senior adviser to the group, “was involved in the development” of the code of conduct that the group adopted banning itself from using third parties such as placement agents and lobbyists to obtain investments with pension funds.
Levitt was behind the SEC’s proposal of a G-37-like rule for investment advisers in August 1999, which stemmed in part from concerns that individuals and firms were making political contributions to pension fund managements in return for their investment business.
The rule, which all five commissioners agreed to propose at that time, would have barred investment advisers for two years from receiving compensation for providing investment advisory services to state or local government clients if the advisers, their partners, their executive officers, or solicitors had contributed to government officials who could influence the award of business to them.
The rule was opposed by the Securities Industry Association — which in 2006 merged with The Bond Market Association to form the Securities Industry and Financial Markets Association — the National Governors’ Association, and the National Association of State Treasurers, as well as then-Senate Banking Committee chairman Phil Gramm, R-Tex. Gramm accused the SEC of overstepping its jurisdiction and “trying to become a little Federal Election Commission.”
In 2000, SEC officials seemed to be rethinking the rule, said they were considering if it was the best regulatory approach for investment advisers.
However, earlier this year SEC chairman Mary Schapiro said the SEC may consider re-proposing such a rule.
Lynn Hume contributed to this article.