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Christian Smith-Socaris on May 21, 2009 - 12:03pm
New York's Attorney General, Andrew Cuomo, is in the midst of a two-year investigation into kickbacks paid to state political staff in exchange for the opportunity to
profitably manage the investments of New York State's public pension
fund. That investigation has now prompted a national effort with a multi-state task force and the Securities and Exchange
Commission working together to uncover rampant pay-to-play abuses.
Nationally there is over $2 trillion in US public pension assets.
Pay-to-play in the public pension fund context takes two forms - campaign contributions and direct kickbacks. The New York AG's investigation began as an investigation of kickbacks paid to key staff in the office of Former Comptroller Alan Hevesi. One former top aide of Hevesi's, Hank Morris, has been indicted on over one hundred charges related to $15 million in payments he received from money managers looking for public pension fund business. One of the "middle men" who arranged the payments has now plead guilty to securities fraud.
Regulatory Failure Leads to Predictable Problems: Beyond the charges in New York, the investigation has unveiled a wild west of unregistered "placement agents" who charge money managers to market their services to pension funds. It appears that half of these agents are not registered with the federal government as required by law. And it is this basically unregulated business that has been fertile ground for kickback schemes. The other side of the corruption that has been uncovered is garden variety campaign contribution pay to play where donors to the public officials that run the pension funds are used to gain access to fund business. In 1999 the SEC dropped plans to prohibit campaign contributions from those seeking business with a public pension fund. The proposed restriction was in response to a series of previous pay to play incidents, and observers at the time predicted more problems when the SEC backed off from implementing the rule.
The SEC is now reconsidering the rule, but the State of New York is already using its power to rein in these corrupt practices. Placement agents and fees have now been banned in New York. And just days ago, Carlyle Group, the second largest private equity firm in the nation settled with the Attorney General for $20 million. Carlyle admitted paying more than $12.3 million in fees to a company that employed Hank Morris. In addition, Carlyle partners and employees contributed $78,000 in campaign contributions to Hevesi. The firm has agreed to adopt a new code of conduct barring most campaign contributions to pension fund officials in What the NY AG called "a revolutionary agreement."
Investigations Now Active in Four States: These investigations and action have lead to a wave of revelations of dubious conduct across the country. In fact, some of the "placement firms" appear to have operated in many states. California's Public Employee Retirement System has moved to require disclosure of placement agents, as is being considered by many other states . New Mexico is also investigating pay to play in its pension system. That investigation has snared Gov. Richardson's former Chief of Staff, who has been accused in a lawsuit of pushing state officials to make certain mortgage-related securities. Additionally, New Mexico and Connecticut have fired Aldus Equity Partners, and investment firm that allegedly took part in another multimillion dollar kickback scheme. The SEC filed charges against the company last month.
As the multi-state task force gets up and running, observers expect that these investigations will continue to spread across the country. With little oversight and trillions of dollars in the pension systems, this has been a scandal waiting to happen. And once again the states have had to take the lead in bringing people to justice, because the feds, as is their habit, have been asleep at the switch.
Progressive States Network - Reduce Influence of Money in Politics
NY AG Cuomo - Cuomo Announces Landmark Settlement with Carlyle Group to Eliminate Pay-to-Play in Pension Funds Nationwide
Daily News - NY Pay-to-Play Scandal Seems National in Scope
Workforce Management - Public Pension Funds Scurrying to Cut Off Future Pay-to-Play Action
New Mexico Independent - A Hard Time for Aldus Equity
Washington Post - Carlyle Settles Pension Probe