Taking Stock of Cuomo's Pension Investigation

When Andrew Cuomo leaves office, he will be remembered for his far-reaching investigation of corruption around the New York State public pension fund. The probe revealed a deeply flawed system for awarding investments by the fund, with some investments going to those hedge funds and other funds that provided kickbacks to state officials or their cronies. 

Cuomo has been portrayed at times as an over-zealous prosecutor seeking to criminalize normal business dealings. But as we have argued here earlier, Cuomo has actually gone lightly on many of the figures involved in this case, given the crimes they allegedly committed. Financier Steve Rattner has complained publicly about his treatment by Cuomo, but the better question is why he hasn't faced criminal charges. 

Still, some people are likely to do prison time in this probe -- including Alan Hevesi -- and Cuomo's accomplishments are significant. Here are the key outcomes of the investigation:

• Eight guilty pleas to date, including by former Comptroller Alan Hevesi; Hevesi’s former political advisor Henry “Hank” Morris; former Chief Investment Officer at the Office of the State Comptroller David Loglisci; former Liberal Party Chair Ray Harding; investment advisor Saul Meyer; hedge fund manager Barrett Wissman; unlicensed placement agent Julio Ramirez; and venture fund manager Elliott Broidy.
• Major financial penalties from companies and individuals involved in the corruption totaling $161 million that will be turned over to the state pension fund and state. 
• A Public Pension Fund Reform Code of Conduct, which bans investment firms from compensating intermediaries for introductions to public pension funds. Twenty-one firms have endorsed the Code so far. 

Why Isn't Steve Rattner Facing Criminal Charges?

Disgraced financier Steve Rattner and his defenders have been energetically arguing that New York State Attorney General Andrew Cuomo is going overboard in his campaign against Rattner -- with a new effort seeking at least $26 million from Rattner and to ban him for life from the securities industry. As reported recently:

Attorney General Andrew Cuomo "has been trashing my reputation for a year and a half," Mr. Rattner said Monday in an interview with The Wall Street Journal. "There was a line," he said, speaking of actions he took while trying to secure business from the fund. "I felt I was well on the right side of that line."

If I were Steve Rattner, I'd pay the $26 million and count my blessings. Indeed, what I don't understand is why Cuomo is going so easy on Rattner? Why isn't the financier facing criminal charges and possible prison time for actions that appear to have been brazenly illegal? The most recent press release from Cuomo's office offers new details of Rattner's kickbacks to influence investment decisions by the New York State Comptroller:

The series of kickbacks paid or arranged by Rattner include the following:

• Rattner paid over $1 million in sham placement fees to Henry “Hank” Morris, then-Comptroller Alan Hevesi’s paid political adviser and campaign manager.
• Though Morris provided no legitimate placement services, Rattner paid these fees in order to influence Hevesi’s and then-Chief Investment Officer David Loglisci’s decision to make investments totaling $150 million in Quadrangle Capital Partners II (“QCPII”), a private equity fund.
• At Morris’s request, Rattner arranged a DVD distribution deal for a movie, “Chooch,” produced by Loglisci’s brother, through a Quadrangle portfolio company. Though it was not originally interested in “Chooch,” the portfolio company eventually entered into a distribution deal with Loglisci’s brother, after Rattner had instructed the company’s CEO to reconsider the film, because David Loglisci was important to Quadrangle.
• Rattner also connected Loglisci’s brother to various people at a film channel company, IFC, in which Quadrangle was an investor and on whose board Rattner sat at the time.
• At Morris’s request and in order to influence Hevesi, Rattner arranged for third-party contributions totaling $50,000 to Hevesi’s re-election campaign. Shortly thereafter, the CRF increased its total investment in QCPII from $100 million to $150 million. Rattner ensured that the contributions were made through third-parties in order to conceal his role and to ensure his name did not appear on public donor records.

The press release says: “Steve Rattner was willing to do whatever it took to get his hands on pension fund money including paying kickbacks, orchestrating a movie deal, and funneling campaign contributions,” said Attorney General Cuomo. “Through these lawsuits, we will recover his ill gotten gains and hold Rattner accountable.”

Cumo's investigation into what his office calls a "criminal scheme" has ressulted in seven guilty pleas, including some with prison time attached. And Cuomo has also called what Rattner did "fraud." A Cuomo spokesman recently added that Rattner's behavior was "the most egregious of all the actions in the New York 'pay to play' scam. He effectively stole from the taxpayers, defrauded the state pension fund and then lied to this office about it."

And yet there is no talk of criminal charges for Rattner or prison time.

My guess is that Cuomo's office is doing what Spitzer's office did before him: get the best deals they can without ever having to go trial against wealthy defendants who will fight them for years and may possibly prevail because of superior resources and the complexity of these cases.

In other words, Steve Rattner is getting off lightly here. 

Rattner Settles with SEC Only to be Hit with Charges by Cuomo

First Havesi, now Henry "Hank" Morris. The New York State pension fund has been the source of numerous investigations following tips that it was engaging in "Pay to Play" tactics that have become commonplace in the pension fund industry in recent years.

Henry "Hank" Morris, who pleaded guilty to a violation of New York state's Martin Act, will be required to pay $19 million and could receive up to four years in prison when he is sentenced early next year.

Mr. Morris, who pleaded guilty before State Supreme Court Justice Lewis Bart Stone, becomes the eight person convicted in the long-running probe by New York Attorney General Andrew Cuomo, the state's Democratic governor-elect.

Mr. Morris's former employer, ex-New York Comptroller Alan Hevesi, pleaded guilty last month in the same investigation.

Mr. Morris, characterized by the attorney general's office as the key figure in the alleged kickback scheme, was accused in an indictment by Mr. Cuomo of accepting sham "placement" fees as a broker for New York's $125 billion Common Retirement Fund, one of the country's largest pension funds. Rather than earning the fees, Mr. Morris simply directed the investments to people who hired him and assisted Mr. Hevesi politically, Mr. Cuomo said.

"I intentionally engaged in fraud, deception … and made material false representations and statements with intent to deceive and defraud," Mr. Morris said in a prepared statement to the court.

I wrote a recent piece detailing how many of our nation's pensioners have been using their control of billions to earn kickbacks from outsourced investment firms. If the practice is so rife throughout the industry, the question regulators must now ask themselves is what measures need to be put into place to stop it. Catching the acts "after-the-fact" should no longer be the primary objective if investigators now know that the fraud is happening all the time. One direction that should be encouraged are new regulations in the boardrooms of these pension funds in order to better sniff out potential kickback schemes. Whatever happens, however, state pensions are facing a bleak future because of growing debt and the economic downturn. If they are to survive the next crisis, they need to rid themselves of fraudulent dealings that produce inefficiency and investigations.



Major "Pay For Play" Figure Agrees To Ban From Securities Industry

Not the person the White House probably wanted to see in the news - Steven Rattner, the individual once in charge of Obama's initiative to overhaul the auto industry, was reported to have agreed to a $5 million settlement and a partial ban on participating in the securities industry.

The story of Mr. Rattner is quite striking. Worth hundreds of millions of dollars, founder of the powerful Quandrangle Group and long-time industry insider, Mr. Rattner certainly had everything that one could have wished from a career in finance. Yet, these most recent charges are not the first time he has been caught pushing the boundaries of ethical behavior. After being promoted to the job of auto industry overseer, it was revealed that Rattner had been an investor in the hedge fund powerhouse Cerberus, which had significant stakes in Chrysler and GMAC.

At the same moment, the S.E.C. and New York State Attorney General Andrew Cuomo were investigating a case involving Rattner's alleged "pay to play" deals with the state's pension fund. Pension funds are massive organizations that require the services of highly skilled financial professionals in order to meet their annual goals. The boards that run the funds will often hire independent advisors to help management the fund's assets. Yet, the fairness of the selection process can be undermined in two ways, both of which are often referred to as "pay to play":

First, independent advisors looking to gain access to these funds may bribe the elected officials in order to skew the selection process. Second, these board members may require under-the-table contributions as a prerequisite for the advisors to work for the fund.

The recent rise in pay to play schemes has touched pension funds around the country, most famously CALPERS, the California behemoth that admitted to working closely with such insiders. They were forced to settle with prosecutors for a crippling $895 million in 2008 and recently announced that they were severing ties with a different private equity group, Pacific Corporate Group, after the group's recent settlement with Cuomo.

Things have not been pretty for the $125 billion New York pension fund, either. Alan G. Hevesi, the former state comptroller, pleaded guilty just last week for steering money to an organization that had contributed to his campaign. David Loglisci, the former chief investment officer, pleaded guilty last March on claims that he often conceded control of the fund to Mr. Hevesi's top political officers.

The problems for Mr. Rattner began in 2004 when, upon hearing that pay to play was common industry practice, he reached out to Mr. "Hank" Morris, Mr. Hevesi's top political advisor, and soon Quadrangle became the happy recipient of a cool $100 million from the pension fund. Afterwards, it was revealed that Rattner had been involved in the distribution of a film made by the brother of the fund's chief financial officer, a clear conflict of interest. When the movie allegations first arose, Rattner was accused and later acquitted following information supplied to prosecutors claiming that he was in no way involved in the movie's distribution. Soon after, however, information surfaced that contradicted these claims, and Rattner was brought back into court.

Yet, the consequences of this behavior are very marginal in the scheme of things. A $5 million fee for a man worth hundreds of millions is certainly not the message that the S.E.C. should be sending to others who engage in this elicit behavior. While securities fraud in the past has often been a game played with rich people's money, investment firms have been creating ever more elaborate schemes in the pursuit of squeezing profits out of the average individual (think the most recent mortgage crisis).

Playing with pension funds, however, is much more dangerous, and the recent rise in pay to play settlements should send a clear warning signal not only to the federal government, but to those putting their money in these organizations. The incentive for investment firms to enter the market is clear, as public pension plans alone hold approximately $2.9 trillion in assets. Yet, workers place their complete trust in these organizations to do what is right with their money. When pension funds are caught up in the scandals, it is not the embarrassment of the funds that should be making headline news, but rather the fact that they are playing with future security of millions of workers. Unlike the mortgage crisis, where many individuals bought outside their means and failed to read the fine print, pension funds become embroiled in conflict of interest scandals without ever consulting those from which they take money.