Broker lawyers

Why did a law firm take a fee to re-introduce CalPERS to one of its long-term GPs?

New York Attorney General Andrew Cuomo’s investigation into pension fund fraud has uncovered an interesting detail of the more freewheeling placement environment of yesteryear—a law firm that acted as a sort of placement agent.

Earlier this week, US law firm Manatt Phelps & Phillips agreed to a five year ban on soliciting business from any New York public pension funds and will pay $550,000 in a settlement with Cuomo’s office.

Manatt had attempted to place investments with New York state pension funds.

In March 2004, an Albany-based partner at Manatt arranged a meeting between an investment firm and investment staff at the New York State Teachers Retirement System. This individual also attempted to arrange a meeting for the same investment firm with the state pension fund, but was unsuccessful. In August 2008, the Albany-based partner at Manatt attended a meeting between investment firm Kellner DiLeo & Co and New York State Comptroller Thomas DiNapoli.

Manatt openly boasts of its connections to officials on its website.  “Our offices in Sacramento and Albany – the capitals of California and New York – provide connections to government decision makers and to solutions that are unavailable from our competitors.”

While the law firm failed to secure investments in New York pension funds, Manatt had more success in California.

Manatt, in partnership with lobbying group Platinum Advisors, helped place a $25 million investment from the California Public Employees’ Retirement System with Levine Leichtman Capital Partners Fund III in 2003. Manatt and Platinum each received $187,500 in fees from 2004 through 2006.

Not only is it unusual that a lobbying group and a law firm would get a success fee for a pension investment, but it is even more unusual that a fee would be paid by Beverly Hills-based Levine Leichtman for a CalPERS investment. The firm already had a longstanding relationship with the pension.

The $217 billion pension fund has had capital committed to Levine Leichtman funds since 1998, according to CalPERS documents.

This week’s settlement placed Levine Leichtman back in the spotlight after the firm settled its own involvement with the pay-to-play case last year. In September 2009, Levine Leichman turned over $200,000 that it had recovered from its former placement agent Wetherly Capital Group.

Levine Leichtman hired Wetherly Capital Group, a Los Angeles-based broker dealer, as a placement agent for its interactions with the New York Common Retirement Fund. Wetherly agreed to pay Hank Morris – chief political aide to the Common Retirement Fund’s former-comptroller, Alan Hevesi, through a sub-finder agreement with Morris’s broker-dearler firm, Searle & Co, whereby Searle would receive 40 percent of any placement fees that Wetherly received from any Common Retirement Fund investment with Levine Leichtman.

The Cuomo investigation has changed the fundraising market, probably permanently. It has put a number of so-called placement agents out of business and made life harder for the remaining legitimate placement agents, not to mention for GPs who need to maintain relationships with the public US limited partners. And in the case of law firms, services which remotely smell like influence peddling are definitively off the menu.