In a development that represents the first official implication of wrongdoing by private equity professionals stemming from the latest pay-to-play scandal to rock the industry, Dallas-based private equity advisory firm Aldus Equity Partners and its founder Saul Meyer are facing charges in connection with the alleged kickback scheme involving the $120 billion New York State Common Retirement Fund.
The Securities and Exchange Commission has filed a civil complaint, seeking monetary penalties from both Meyer and Aldus Equity, while New York State Attorney General Andrew Cuomo announced the criminal charges and subsequent arrest of Meyer, who was charged with one count of securities fraud in violation of the Martin Act, a Class E felony. Meyer was arraigned on April 30 in New York County Court and released on a $200,000 bond.
Aldus Equity and its attorney, Matthew Orwig of Sonnenschein, Nath and Rosenthal LLP, a Chicago-based law firm, issued a joint press release regarding the situation. In the statement, Orwig called what he termed a “threatened legal action” by the SEC “appalling and careless” and said the SEC filed the court motion “without completing an investigation or fulfilling a commitment to meet with Aldus principals before taking any legal action.”
The firm itself responded to the criminal charges against Meyer with a statement that reads in part: “Obviously, at this time, Saul’s full focus will be on his issues in New York. At the firm, we are working to rapidly communicate with our clients, employees and associates. Our highest priority is the commitment to our clients’ best interests. In the immediate and long-term future, we will apply all of our resolve, focus and talents to those goals.”
The SEC complaint contends Meyer and Aldus Equity took part in a kickback scheme in order to secure investment commitments from NYSCRF. “As alleged in our complaint, Aldus was chosen by the pension plan because of Aldus’s willingness to illegally line the pockets of others,” said James Clarkson, Acting Director of the SEC’s New York Regional Office, in a press release. “When another investment manager refused to pay kickbacks, that firm was rejected and Aldus cashed in.”
The SEC alleges that Aldus paid a shell company $320,000 in sham finder’s fees in return for a total of $375 million in commitments from the pension fund from 2004 to 2006.
The SEC also alleges that David Loglisci, the former deputy comptroller and chief investment officer for NYSCRF, chose Aldus Equity as the limited partner’s emerging fund portfolio manager only because of Meyer’s willingness to pay Hank Morris, a political advisor and chief fundraiser to former New York State Comptroller Alan Hevesi.
While Aldus Equity was negotiating to manage the emerging fund portfolio, an associate of Morris told Meyer that Aldus Equity would win the contract if the firm paid Morris part of the management fees received from NYSCRF, according to the SEC complaint. After Morris’s associate said Aldus Equity would not be chosen if it did not do so, Meyer arranged for Aldus Equity to kick back 35 percent of its management fees to Morris, according to the complaint.
News of the alleged kickback scheme first erupted in mid-March with charges brought against Loglisci and Morris. The pair are accused of coercing firms to pay millions in finder’s fees to companies controlled by Morris in exchange for commitments from NYSCRF to their funds. Both Morris and Loglisci have denied the charges.
Meantime, New York’s felony criminal complaint alleges that Meyer paid illegal kickbacks to Morris in exchange for business with NYSCRF. The state also alleges Meyer sought additional business from NYSCRF while helping one of Hevesi’s sons get a $25 million commitment for private equity fund Catterton VI from the New Mexico State Investment Council, for which Aldus served as a consultant. A week after New Mexico made the pledge, Meyer got an additional $200 million mandate for the New York emerging manager program.
Following the disclosure of the charges, New York State Comptroller Thomas DiNapoli terminated for cause NYSCRF’s relationship with Aldus Equity, specifically citing the felony complaint in New York. DiNapoli said the process to terminate Aldus Equity had already been started, and that the indictment “simply accelerated our actions.” DiNapoli also followed through on a promise to pursue all available legal remedies against Aldus Equity by filing a $5 million suit against the firm and its principals on May 6.
The impact on Aldus Equity’s client roster looks to be devastating. The same day that news of the charges broke, New Mexico Governor Bill Richardson ordered State Investment Officer Gary Bland to sever ties to the firm and to suspend all of its alternative investments until the LP has a policy in place requiring the disclosure of fees paid to placement agents. In the interim, existing financial consultants will guide the private equity program, and the state will search for a new private equity adviser.
Other pension plans have either ended their relationship with Aldus Equity, are in the process of doing so, or are exploring the issue. These include The Fort Worth Employees’ Retirement Fund, which has terminated its contract; New York City Retirement Funds, which has said it’s will likely to do so; Connecticut Retirement Plans and Trust Funds, which plans to wind down its relationship with the firm over the next 90 days; and California Public Employees Retirement System, which has excluded Aldus from further consideration in its search for private equity advisers. Other LPs exploring the issue at press time were Los Angeles Fire and Police Pensions, Louisiana State Employees Retirement System, and Oklahoma Teachers Retirement System.