Friday Letter: Ban the politicians

The way to avoid any future ‘pay-to-play’ scandals is not to ban placement agents, as some public officials have called for, but rather to ban the politicians themselves from the investment process. 

It’s been a bad week for the placement business. Setting aside the near total halt in primary capital commitments across private equity, the image of (genuine) placement agents has taken a beating from an unfolding scandal emanating from (but not confined to) the state of New York.

For anyone who has been stranded on a desert island, the scandal hit headlines last week when the New York Attorney General and the Securities and Exchange Commission made public their investigations into an alleged scheme involving David Loglisci, the former deputy comptroller and chief investment officer of the $153 billion New York State Common Retirement Fund, and Henry Morris, previously a top political advisor to former New York State comptroller Alan Hevesi.

The SEC alleged Loglisci directed the pension to invest billions of dollars with private equity and hedge fund managers who paid millions in sham “finder’s fees” to win investments from the fund. Loglisci allegedly made sure investment managers that made the appropriate payments to Morris, and other designated recipients, were rewarded with commitments.

The SEC has charged them with fraud and the two have also been indicted by New York’s State Supreme Court on criminal charges including enterprise corruption and money laundering. New York Attorney General Andrew Cuomo has also indicted former head of the New York Liberal Party Raymond Harding and Barrett Wissman, who formerly led Texas-based hedge fund Hunt Financial Ventures. Harding is accused of acting as a fraudulent placement agent for investments the pension made, while Wissman, accused of both paying Morris finder’s fees as well as receiving kick-backs from those fees, pleaded guilty last month and will pay up to $12 million in penalties.

Public officials have subsequently been shocked to learn that public pensions overseen by elected and politically appointed individuals may have been influenced by factors other than the merits of the investment opportunities themselves. In response, the heads of the New York State Common Retirement Fund and the New York City comptroller’s office have respectively stepped forward to announce bans on the “use” of placement agents, with apparently no effort to distinguish between legitimate placement services and the toxic kind.

Given the public’s crisis of confidence in the way US public pension dollars are invested, perhaps the ban is an inevitable short-term fix. The Carlyle Group, one of the many firms that has been linked to the scandal but not charged, has even gone so far as to say it will not use placement agents in the US.

But blaming the problem on the presence of “placement agents” is both an overreaction and under-ambitious at the same time.

The broader problem is that people with political career aspirations, campaign fundraising needs, union responsibilities, electoral constituents and party obligations should not have any say over how people’s retirement assets are invested. Where they do, potential conflicts naturally arise. This is not to say that public pensions cannot be honourably and professionally managed – most are – but it is to say if you want to stamp out pay-to-play, address the root motivations behind all these scandals.

New York City comptroller William Thompson, to give one example, means well by calling for the ban on placement agents from his office. But will Thompson, who was elected twice as comptroller and is now running for NYC mayor, also ban campaign donations from placement agents? We ask because over the years he has received more than $12,000 from the two founders of a self-described placement agent in Los Angeles called Wetherly Capital, according to campaign finance records.

Wetherly, not accused of any wrongdoing, was mentioned in a New York County Supreme Court indictment as having paid several cheques to Morris. A report yesterday by Pro Publica, a non-profit investigative journalism outlet, said Wetherly has also allegedly shared fees with Morris for obtaining commitments for an unnamed GP with three major California pensions.

GPs hire placement agents on the belief that doing so will lead to superior fundraising results. The only wrong reason to hire a placement agent is if you believe they will push buttons other than the one labelled “maximise returns without undue risk of loss” to secure capital commitments. Where politicos influence pensions, there are many such buttons.