Private equity caught up in Detroit scandal

The indictment of Detroit's former treasurer has revealed an alleged pension pay-to-play scheme in which managers and consultants are accused of providing bribes in exchange for business with two of the city’s municipal pension systems.

Federal prosecutors have exposed an alleged pension pay-to-play scandal in Detroit that is said to have involved private equity professionals paying bribes and giving gifts to politicians in exchange for business with the city’s Police and Fire and General Retirement systems.

Unlike a similar scandal that broke in New York in 2009, which involved some of the biggest GPs in the world, the Detroit situation allegedly involves several private equity real estate managers, consultants and small-scale buyout firms.

A grand jury in January handed down an indictment of Jeffrey Beasley, Detroit’s former treasurer, for his alleged role in strong-arming managers and consultants into lavishing him, disgraced former Mayor Kwame Kilpatrick and other administration officials, with gifts to win commitments. The Federal Bureau of Investigation and the US Attorney for the Eastern District of Michigan brought the indictment against Beasley.

In total, the Police and Fire and the General Retirement pension funds claim to have lost $84 million because of the alleged pay-to-play scheme, in which Beasley allegedly helped direct more than $200 million in commitments to various managers and consultants, according to the indictment.

One of the pension systems, the Police and Fire Retirement System, has filed a lawsuit to recover funds in situations where there was “nefarious conduct”, according to Sean Neary, chairman of the Police and Fire Retirement System.

“We unequivocally support efforts by federal officials to prosecute any criminal activity associated with the pension fund,” Neary said in a statement.

Lavishing gifts

The indictment doesn’t name any of the firms involved, though the names become apparent by cross-checking the dates of each incident in the documents with the corresponding pension meeting minutes.

For example, the indictment alleges that an investment consultant with the Police and Fire pension system lavished gifts and money on Beasley, Kilpatrick and other administration officials in exchange for business with the system.

The Police and Fire pension conditionally awarded the consultant a $20 million commitment on 8 June, 2006, the indictment charged. A review of the minutes from the 8 June, 2006 meeting show that the only $20 million conditional commitment made was to MayfieldGentry Realty Advisors Genesis Value Fund. MayfieldGentry is an advisor but has also developed separate accounts, joint ventures and value-added commingled private equity funds – Genesis Value Fund I and II, according to its web site.

In return for the “things of value” MayfieldGentry allegedly bestowed on Beasley, Kilpatrick and others, the firm “maintained its position as an investment manager and thereby earned substantial fees,” the indictment said.

Further, Mayfield Gentry Realty Advisors disclosed in a US Securities and Exchange Commission filing that it was served with a Wells Notice in January related to “certain expenditures” made for the benefit of, or at the request of, some trustees of two Detroit-area pension funds. A Wells Notice is sent by a regulatory agency to inform the target of an investigation that they are about to be charged.

MayfieldGentry declined to comment. The firm is run by president and chief executive officer Chauncey Mayfield.

Another real estate consultant was allegedly caught up in the situation was for more positive reasons. According to the indictment, the Police and Fire pension system’s long-time real estate advisor was terminated by the board on 11 October 2007 after it refused to make a $15,000 donation to the Kilpatrick Civic Fund, a pool of money formed in 1999 ostensibly for community improvement that had been routinely looted by the mayor for personal benefit. Beasley allegedly asked the advisor to “send me a love offering”.

A review of Police and Fire pension meeting minutes from 11 October, 2007 show that the board terminated its contract with advisor The Townsend Group, which had been the system’s real estate advisor since 1990. Townsend declined to comment.

It is unclear whether any of the firms involved in the alleged scheme will be charged; a spokesperson for the US Attorney’s office did not respond to questions about the indictment.

The Beasley indictment is just a small part of the larger federal probe of Detroit’s City Hall, which from 2002 to 2008 was run by Kilpatrick and his associates. Kilpatrick left office in disgrace in 2008 after pleading guilty to various charges and served some time in prison.

New charges of corruption were brought against Kilpatrick in 2010 and a new trial is set for this summer.