New York state pension bans all placement agents

The state’s comptroller, Thomas DiNapoli, has banned the use of placement agents in investments with the $122bn pension, and has launched a review of pension investments with firms involved in the New York Common kick-back scandal. The Carlyle Group has agreed to stop using placement agents in connection with public pension funds.

New York State Common Retirement Fund has banned the use of placement agents, paid intermediaries and registered lobbyists from participating in investments with the $122 billion pension in the wake of a growing kick-back scandal involving the pension.

The comptroller, Thomas DiNapoli, announced the ban Wednesday and also said he has launched a review of all the pension’s investments with firms under investigation by the state’s attorney general, Andrew Cuomo, and the US Securities and Exchange Commission. Those firms include The Carlyle Group and Quadrangle Group.

“Since I took office, we’ve worked to implement reforms that will help restore integrity and trust in this office,” DiNapoli, who controls the state pension, said in a statement. “Banning placement agents and lobbyists from involvement in investments is the next step, and it’s a big step.”

New York City Comptroller William Thompson has asked trustees of the five city pensions, which combined have total assets of about $83 billion, to approve a ban on placement agents as well.

Any pending commitments the pension has made to investment funds that involved placement agents will be exempt from the ban, according to a pension spokesman. Placement agents have been involved in only about 10 percent of the investment activity with the pension, and mostly involving hedge funds and private equity funds, the spokesman said.

New York Common hired Day Pitney, a law firm specialising in pension issues, and Pension Consulting Alliance, an investment consulting firm, to help with the investment review.

“We'll be looking at the relationships, at the investments and in both cases, what our obligations and what our options are,” the spokesman said. Asked if the review could result in the pension severing relationships with GPs, the spokesman declined to comment, other than to say that could be something that “falls in the range of all options”.

The spokesman declined to comment about what specifically the pension will be looking for in the review.

DiNapoli is drafting legislation to codify the pension changes and he has asked the state’s insurance

If two of the largest pension funds in the country and one of the nation's largest private equity firms can agree to stop using placement agents, it is possible to implement this reform.

Andrew Cuomo, New York attorney
general

superintendent, Eric Dinallo, to codify the ban into pension regulations. The ban includes entities “compensated on a flat fee, a contingent fee or any other basis”, DiNapoli said. New York Governor David Paterson said Wednesday he supported the ban.

“It is unacceptable that a placement agent have any influence in the investments of the state pension fund,” Paterson said in a statement. Paterson said he charged Dinallo to “immediately issue an emergency regulation making Comptroller DiNapoli's ban on the use of placement agents a permanent state regulation”.

New York Common is not stepping back from private equity in any way, the spokesman said.

Carlyle, which has been caught up in the scandal but has not been accused of any wrongdoing, decided to stop using placement agents to gain commitments from public pension funds, Cuomo said Wednesday in a statement.

“As one of the nation's largest private equity firms, Carlyle's decision to implement this reform sets an example that we hope others in the industry will follow,” Cuomo said. “If two of the largest pension funds in the country and one of the nation's largest private equity firms can agree to stop using placement agents, it is possible to implement this reform across the board. It is a long overdue reform.”

There is a difference between “finders” like Morris who are “mere conduits for cash” and legitimate placement agents, many who are registered with the SEC or other regulatory bodies and provide services other than seeking funds from pensions, according to Kelly DePonte, a partner with placement agent Probitas Partners.

“We provide advice on structuring funds, develop marketing materials and fund raising strategies, and often assist in negotiating LPAs, highlighting key concerns,” DePonte said.

DiNapoli’s announcements come as a kick-back scandal involving the state’s public pension, one of the largest in the US, continues to grow. Cuomo has indicted four people so far involved in the scheme, under which a former state political operative and the former chief investment officer of the pension allegedly collected sham finder’s fee from investment firms for commitments from the pension.

On Tuesday, the comptroller of New York City, William Thompson, announced a separate investigation into Quadrangle Group, formerly headed by Steve Rattner, who is now serving as an advisor on the auto industry to US President Barack Obama. Thompson is looking into whether Quadrangle purposely misled the city pension system by withholding payments the firm may have made to a company affiliated with Henry Morris, one of the people who has been indicted in the kick-back scheme. On Wednesday, Cuomo said he launched his own investigation into the allegations against Quadrangle.

Also charged in the case are David Loglisci, former chief investment officer with the state pension; former head of the New York Liberal Party Raymond Harding and Barrett Wissman, who formerly headed up Texas-based hedge fund Hunt Financial Ventures.

The scandal has moved beyond New York to New Mexico, where the state’s $11.5 billion oil and gas endowment has begun reviewing all the investment managers it works with across all asset classes to find out if they have any connections with the scandal. Earlier this week, the endowment’s governing body, the New Mexico State Investment Council, suspended its private equity advisor, Aldus Equity, pending a review of the work the firm has done for the endowment since it was hired in 2004.

New Mexico’s review revealed that Carlyle and Quadrangle both used a company affiliated with Morris to secure investments from the endowment of $20 million a piece.

None of the firms named in complaints filed by New York's attorney general or the SEC have been accused of wrongdoing.