PCG Pays $2 Million To Escape New York Probe

Pacific Corporate Group, a La Jolla, Calif.-based private equity consultant, has agreed to pay $2 million as part of a settlement related to the New York state pension kickback scandal.

PCG also has agreed not to use placement agents to solicit business from public pension funds, although it can continue to use placement agents when securing fund commitments for public pension clients (except when banned by a client, like the New York State Common Retirement Fund). In exchange, NY Attorney General Andrew Cuomo said that he has ended the investigation into PCG, although did not specify if the termination was to all of PCG’s activities or only to its New York dealings (PCG has major business with state and municipal pension systems in California, and word is that Cuomo was taking a look via The Martin Act). [Update: Cuomo spokesman says that the agreement “ends this office’s investigation into PCG.”]

In a statement, PCG said: “We are taking these steps to make the public whole for the improper actions of a former executive, to put this episode behind us and to move our business forward.”

That former executive is Steve Moseley, who in late 2006 helped form a $750 million co-investment vehicle funded by the New York State Common Retirement Fund. It was done in partnership with hedge fund The Clinton Group (where Moseley later went to work), and allegedly included an undisclosed participation by indicted “placement agent” Hank Morris. The vehicle also included a partial ownership, and investment committee seat, for Barrett Wissman, a Texas hedge fund manager who has plead guilty to securities fraud.

There have been no charges filed against Moseley, who said in May that he had “been assured by the Attorney General of New York that I am not a target of the ongoing industry investigation.”

As a side note, the co-investment fund itself has been well in the black, despite being focused on mega-buyout transactions.

Cuomo’s office is expected to publish an Assurance of Discontinuance later today, but peHUB has obtained some of the relevant language [Update: Here’s the whole thing]:

23. In or about February 2001, PCGCP secured a $150 million commitment from the CRF to manage a co-investment vehicle, known as the New York State Retirement Co-Investment Fund (“Fund I”). PCGCP did not use a placement agent to obtain this initial investment; nor did PCGCP use placement agents with respect to any subsequent investments it obtained from the CRF.

24. By in or about the fall of 2005, PCGCP had deployed substantially all of the capital committed by CRF to Fund I. PCGCP had enjoyed approximately 30% returns on Fund I, and so PCGCP anticipated that it would receive an additional allocation from the CRF. PCGCP initiated conversations with CRF investment staff regarding such allocation. These discussions were led by a partner of PCGCP who has since left the firm (“PCGCP Partner 1”). PCGCP Partner 1’s main point of contact at CRF was David Loglisci, the Chief Investment Officer at that time. Very early in their discussions, Loglisci explained to PCGCP Partner 1 that he wanted to continue the CRF’s co-investment program, but wanted to do so in the context of a joint venture involving PCGCP as well as a second firm, the Clinton Group, a hedge fund manager headquartered in New York.

25. In or about February 2006, Loglisci informed PCGCP Partner 1 that he had set up a meeting for PCGCP Partner 1 with a certain Dallas-based hedge fund manager (the “Dallas Manager”), whom Loglisci identified as a friend and an informal advisor to the CRF. PCGCP Partner 1 traveled to Napa, California at Loglisci’s direction to meet with the Dallas Manager, and an executive from the Clinton Group (the “Clinton Executive”). At the meeting, the Dallas Manager informed PCGCP Partner 1 that it was Loglisci’s intention to include the Dallas Manager alongside PCGCP and the Clinton Group as a partner in the joint venture. Further, the Dallas Manager informed PCGCP Partner 1 and the Clinton Executive that the Dallas Manager would be splitting his share of the proceeds of the joint venture with Hank Morris. The Dallas Manager explained to PCGCP Partner 1 that Morris would be a concealed participant in the deal, and that there would be no CRF investment without the inclusion of the Dallas Manager and Morris.

26. When PCGCP Partner 1 reported back to his partners at PCGCP, he explained only that Loglisci had proposed a joint venture comprised of the Clinton Group, PCGCP, and the Dallas Manager. At no time did PCGCP Partner 1 reveal to his partners the fact of Morris’s participation in the joint venture. Further, PCGCP Partner 1 did not reveal to his partners that the proposal from Loglisci had been communicated through the Dallas Manager as a take-it-or-leave-it proposition dependent upon the Dallas Manager’s participation in the deal.

27. PCGCP agreed to move forward according to the terms that PCGCP Partner 1 had explained. In or about spring 2006, PCGCP and the Clinton Group worked to finalize details of the joint venture, which came to be known as Strategic Co-Investment Partners (“SCP”). The economic split that the parties agreed to was 45% for PCGCP, 45% for the Clinton Group, and 10% for the Dallas Manager.

28. Loglisci selected Aldus Equities (“Aldus”) to vet SCP for the CRF, instructing Aldus that this was to be an expedited project. At PCGCP’s suggestion, Aldus instructed all parties to the joint venture to sign officer’s certificates. By signing the certificate, the signatory swore on behalf of his employer that he would not pay any third parties on the SCP transaction, and that he did not know of any third parties that were to be paid on the SCP transaction. PCGCP Partner 1 executed an officer’s certificate on behalf of PCGCP. PCGCP Partner 1 represented that no third parties would be paid on the SCP investment. He knew this to be false, because he was aware from his discussions with the Dallas Manager that Morris would receive 5% of the economics on SCP. PCGCP’s founding principal (the “PCGCP Principal”) also executed an officer’s certificate, indicating his understanding that no third parties would be paid on the SCP investment. The PCGCP Principal’s officer’s certificate was properly executed, as he had no knowledge of Morris’s participation in SCP.

29. In or about June 2006, Aldus concluded its analysis of SCP. Shortly thereafter, the CRF informed members of SCP that it planned to commit $750 million to SCP. At the time, this represented the largest single commitment CRF had made in an alternative investment.

30. In or about September 2006, on the eve of CRF making its formal commitment to SCP, three partners, including PCGCP Partner 1, resigned their positions with PCGCP. At the urging of the Clinton Executive and Loglisci, PCGCP Partner 1 went to work at the Clinton Group. Subsequently, CRF investment staff, at Loglisci’s direction, contacted the participants of SCP and informed them that the economics on SCP had changed. Instead of a 45-45-10 split, the Clinton Group would now take 70% of SCP, the Dallas Manager would retain his 10%, and PCGCP would be left with 20%.

31. On or about October 3, 2006, the CRF formally committed $750 million to SCP in its new incarnation.”