In a 27-page document, the New York Attorney General Andrew Cuomo lays out a narrative in which Rattner — then a partner of private equity firm Quadrangle Group — fought to secure business for the brother of New York’s chief investment officer, at the urging of now-indicted “finder” Hank Morris. Specifically, Rattner persuaded a Quadrangle portfolio company (since defunct) sign a DVD distribution deal for the brother’s film – “Chooch” – over the initial objections of portfolio company management.
Once the DVD distribution deal was signed, Rattner retained Morris as a “placement agent,” in order to secure fund commitments for Quadrangle Group. Morris helped Quadrangle raise $100 million from the New York State Common Retirement Fund, even though one of Quadrangle’s legitimate placement agents – Monument Group – only had been able to secure between $25 million and $50 million. This increase occurred without Morris setting up or attending any meetings with NYCRF on Quadrangle’s behalf.
Morris also helped Quadrangle secure $75 million from New York City, in part via a deal with another placement agent named Julio Ramirez, who last year pled guilty to securities fraud. Quadrangle did not disclose Morris and Ramirez’s involvement in official disclosure forms.
As a follow-up, the CIO’s brother helped put Rattner in touch with potential investors on the West Coast. These included Elliott Broidy, who sat on the board of the Los Angeles Fire & Police Pension Fund. That system gave Quadrangle $10 million, and Broidy has since pled guilty to felony charges of rewarding official misconduct.
Ramirez, Broidy, CIO David Loglisci and Quadrangle Group all have been cooperating with the investigation. Yesterday, Quadrangle agreed to pay $12 million in penalties ($7m to NY, $5m to SEC), and called the actions of its former partner “inappropriate, wrong, and unethical.”
Finally, there is this:
“In or around 2006, as Alan Hevesi was running for re-election as Comptroller, Morris called Rattner and expressed to him that he and Hevesi wanted Rattner to be helpful in his re-election efforts. Morris added that others whose funds had received investments were also making contributions. When Rattner explained he had a policy against making contributions to officials with oversight over investments, Morris told him he should contribute money indirectly, by getting a third party to make the contribution.
Thereafter, Rattner asked a Democratic donor he knew to contribute to Hevesi. That person and his wife each subsequently gave approximately $25,000 to Hevesi for New York.”
That’s the official story. Now some more color and thoughts:
1. Quadrangle has been desperate to strike the Cuomo deal since the middle of last year, in order to put this sordid mess behind it. Its problem was that Cuomo didn’t want Quadrangle without Rattner, thus further straining the relationship between the firm and its onetime partner. Not sure why Cuomo changed his tune, but a source tells me that today’s settlement was “on the AG’s timetable, not Quadrangle’s.”
I’m told that Rattner and remaining Quadrangle execs have not held one-on-one talks for at least the past three months, after having spent several preceding months trying to work out a joint settlement. One source suggests that Rattner – reportedly holed up in Tom Lee’s office within New York’s GM building – didn’t like the financial terms proposed by Quadrangle. Another believes that Rattner is playing a strategic waiting game, hoping that Cuomo’s expected gubernatorial run will cause the pay-to-play investigation to peter out.
Rattner is not tipping his hand, except for a brief statement (via counsel) that he “does not agree with the characterization of events released today, including those contained in Quadrangle’s statement.”
2. Quadrangle believes that its explicit disassociation from Rattner could help the firm remain as a going concern. Its $2 billion second fund is approximately 80% called down, and LPs expect another fundraising drive to kick off sometime later this year – probably with a more modest target of between $700 million or $1 billion. The bridge-building began last year, but will go into hyperdrive next week, when Quadrangle holds its annual LP meeting. I hope it kicks off with a special screening of Chooch, but my guess is the wounds are still a bit too fresh.
One LP I spoke with last night believes that Quadrangle’s ultimate fate will be based on fund performance, not Rattner’s actions. CalPERS reports that Quadrangle’s second fund had an IRR of 4.7% through the end of Q3 2009. Could be interesting to watch Quadrangle raise at the same time as M/C Venture Partners, which has a fairly similar strategy…
3. Quadrangle probably doesn’t believe it right now, but this whole thing could have been much, much worse. Imagine if Steve Rattner hadn’t agreed to become Obama’s car czar last year, and was still a partner and most visible face of Quadrangle. I know the Quadrangle guys felt at the time like they’d been blindsided — Rattner promised them and LPs that he’s only leave if Hillary Clinton was elected — but, in retrospect, they caught a break.
4. The Monument Group and Helix Associates should be pissed off. They are legitimate placement agents that raised almost all of Quadrangle’s second fund, save for the shady stuff with Morris. By signing Cuomo’s code of conduct, Quadrangle is tacitly agreeing with Cuomo’s sentiment that placement agents are a highway to corruption. I know the code only refers to the solicitation of business from public pension systems, but the overall thesis is: Placement agents bad.
5. Quadrangle agreed to repay a total of $12 million. My understanding is that the entire total will come “from the general partner,” and not via fund offsets or management fee offsets. Basically, the remaining Quadrangle execs are cutting checks from their own bank accounts (yes, accounts that got fat on LP fees – but this is about as good as one could expect).
6. Much of what Cuomo bases his narrative on appears to be email correspondence between Morris and Rattner. It’s one thing to be corrupt. Quite another to be stupid. Dear future scumbags: Email never disappears!
7. The next shoes to drop here are Rattner and Hevesi. Stay tuned…