Riverstone Settles with New York

Private equity firm Riverstone Holdings has reached a settlement with the NY Attorney General’s office, related to the New York pension fund kickback scandal. Under terms of the agreement, Riverstone will pay $30 million and adopt a “code of conduct” related to its future fund-raising activities.

This is similar to a recent settlement reached between New York and The Carlyle Group, which agreed to pay $20 million and adopt the same rules. One big difference, however, is that Carlyle Group also received assurances that none of its executives would be prosecuted for their dealings with the New York State Common Fund. Riverstone has not received a similar promise for firm co-founder and senior managing director David Leuschen, who remains under investigation.

A Riverstone spokesman declined to comment beyond what the firm said in a press release, which wasn’t much. Among my outstanding questions:

1. What is Riverstone implicitly admitting it did wrong? After all, you don’t shell out $30 million for kicks.
2. Where is Riverstone getting the $30 million? Is it coming from the management company, the partners’ personal bank accounts, a special capital call, etc?
3. Is David Leuschen still a part of Riverstone, and is he expected to remain with the firm going forward? Actually, just got an answer to this one from the aforementioned spokesman: “Nothing has changed with respect to David Leuschen and nothing is expected to change.”

Erin has also put in a call to NY Attorney General Andrew Cuomo’s office, to figure out just how the $30 million figure came to be. It seems to rounded to be a percentage of anything (such as committed capital) or a repayment of anything (such as management fees), so right now it seems to have been plucked out of thin air.

To be more specific, the $20 million Carlyle figure was plucked out of thin air, and Riverstone’s $30 million seems meant to indicate that Riverstone was a worse actor (by 50%). But if Riverstone hasn’t admitted to any wrongdoing, we wind up back at square one.

Here is Cuomo’s press release:
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Attorney General Andrew M. Cuomo today announced an agreement with private equity firm Riverstone Holdings LLC (“Riverstone”) to reform the public pension fund investment system and to resolve Riverstone’s role in Cuomo’s investigation of corruption involving the New York State Common Retirement Fund (“the CRF”). Under the terms of today’s agreement, Riverstone will adopt Cuomo’s Public Pension Fund Code of Conduct and pay $30 million in restitution to the CRF.

“Riverstone is the second to adopt our Code of Conduct which reforms the public pension fund system by ending pay-to-play campaign contributions and the use of intermediaries to sell access to public money,” said Attorney General Cuomo. “My Office has also secured an agreement with them to return $30 million to the state pension fund, which has recently been hit by these tough economic times and suffered a significant decline in value. I commend Riverstone for proactively embracing our reform efforts and encourage other companies nationwide to follow suit.”

Attorney General Cuomo’s code of conduct bans investment firms from hiring, utilizing, or compensating placement agents, lobbyists, or other third-party intermediaries to communicate or interact with public pension funds to obtain investments. To avoid pay-to-play schemes, the Code prohibits investment firms (and their principals, agents, employees and family members) from doing business with a public pension fund for two years after the firm makes a campaign contribution to an elected or appointed official who can influence the fund’s investment decisions. This provision would also bar all firms currently doing business with the pension fund from making such campaign contributions. Investment firms must also disclose any conflicts of interest to public pension fund officials or law enforcement authorities, to increase transparency and avoid abuse of the fund for personal gain.

Riverstone is the second company to sign on to Cuomo’s Code of Conduct and will pay $30 million in restitution to the CRF. This brings to $50 million the total amount collected by Attorney General Cuomo on the Carlyle/Riverstone investments. The Carlyle Group (“Carlyle”) signed onto the code last month and paid $20 million to the State of New York to resolve its role in the Attorney General’s ongoing investigation.

Riverstone is an energy and power-focused private equity firm founded in 2000. It has approximately $17 billion under management across six investment funds. Riverstone conducts buyout and growth capital investments in the midstream, exploration & production, oilfield services, power and renewable sectors of the energy industry. With offices in New York, London and Houston, the firm has committed more than $11.5 billion to 59 investments in North America, Latin America, Europe and Asia.

The Attorney General’s investigation revealed that beginning in 2003 Riverstone was a joint venture partner with the Carlyle Group (“Carlyle”), on three investment deals with the CRF. Carlyle/Riverstone retained Searle, a company associated with Henry (“Hank”) Morris, the chief political aide to then Comptroller Alan Hevesi, as a placement agent to help obtain investments from the CRF. Prior to retaining Searle, the companies had experienced limited success in obtaining investments from CRF. However, after retaining Searle, they obtained approximately $530,000,000 in total investment commitments from CRF in Carlyle/Riverstone funds. In exchange, Carlyle paid Searle over $10,600,000.

Searle then paid the lion’s share of placement fees received from Carlyle to PB Placement, LLC, a shell company controlled by Morris. Unbeknownst to Carlyle, Morris had allegedly entered into a fee-splitting arrangement to pay Wissman half of all these fees. The investment commitments made by CRF and the related fees paid to Searle and others included:

A $150,000,000 commitment to Carlyle/Riverstone Global Energy & Power Fund II, L.P. made in November of 2003 for which Searle was paid $3,000,000 in fees, $1,425,000 of which went to PB Placement and $1,500,000 of which went to Wissman;
A $350,000,000 commitment to Carlyle/Riverstone Global Energy & Power Fund III, L.P. made in October of 2005 for which Searle was paid $7,000,000 in fees, $3,325,000 of which went to PB Placement and $3,500,000 of which went to Wissman; and
A $30,000,000 commitment to Carlyle/Riverstone Renewable Energy Infrastructure Fund I, L.P. through CRF’s fund-of-fund, The Hudson River Fund II, L.P. made in December of 2005 for which Searle received $600,000 in fees, $285,000 of which went to PB Placement and $300,000 of which went to Wissman.
In addition, soon after the CRF’s $150,000,000 investment in Carlyle/Riverstone Global Energy & Power Fund II, a principal of Riverstone made an “investment” of $100,000 in Chooch, a film produced by the brother of then Chief Investment Officer to Comptroller Hevesi, David Loglisci. Carlyle was unaware of that investment and the investment was not disclosed to the CRF. Riverstone employees also made approximately $40,000 in campaign contributions to Comptroller Hevesi’s campaign in 2004.

These investments are alleged as the basis for Martin Act and other charges in the 123-count indictment returned by the grand jury and filed by Cuomo’s office in March against Morris and Loglisci.

The founders of Riverstone stated: “Riverstone strongly supports the efforts by the Attorney General to implement reforms in the public pension fund investment system. To this end, we are the second firm to adopt the Attorney General’s new Public Pension Fund Code of Conduct, which we believe provides for greater transparency and accountability in the solicitation of private equity commitments from the public pension fund community. For the past two years, Riverstone has cooperated fully and voluntarily with the Attorney General and his staff in their investigation and today, in resolution of this matter, Riverstone has agreed to make a $30 million payment for the benefit of the New York State Common Retirement Fund.”

Riverstone has also agreed to sign on to the Attorney General’s Public Pension Fund Reform Code of Conduct, which:

Bans Placement Agents: Investment firms are prohibited from using Placement Agents, Lobbyists, or any other third-party intermediary to communicate or interact with Public Pension Funds for any purpose. The prohibition does not apply to the use of consultants and investment banks to otherwise directly assist investment firms by, for example, preparing marketing materials or performing due diligence;

Bans “Pay to Play”: Prohibits investment firms (and their principals, agents, employees and family members) from doing business with a public pension fund for two years after the firm makes a campaign contribution to any elected or appointed official who can influence a public pension fund’s investment decisions. The prohibition also applies to candidates for such positions, but does not apply to contributions of $300.00 or less to elected officials or candidates for whom the person making the contribution can vote;

Increases Transparency: Requires rigorous, ongoing disclosure of information relating to campaign contributions, the identities, responsibilities and qualifications of investment fund personnel and any payments by investment firms to third-parties in connection with public pension fund matters. Also requires investment firms to promptly publish such information on their websites;

Imposes Higher Standard of Conduct: Holds investment firms to a higher, standard of conduct that avoids even the appearance of impropriety. The Code prohibits (1) improper relationships between pension fund officials and an investment firm’s personnel or agents, (2) “revolving door” employment by investment firms of former public pension fund officials and employees, and (3) improper gifts by investment firms to public pension fund employees and officials;

Enhances Conflicts of Interest Policies: Investment firms are required to promptly disclose and cure any actual, potential and apparent conflicts of interest to public pension fund officials or law enforcement authorities where appropriate.

Ensures Ongoing Compliance: Investment firms must certify annually to the Office of the Attorney General (and any public pension fund that asks) that they are in compliance with the Code of Conduct. Violations of the Code constitute grounds for either termination of an existing investment, disqualification from doing further business with the public pension fund for up to ten years, or both.

Attorney General Cuomo’s investigation into corruption at the CRF has led to a number of criminal charges to date, including charges against Morris and Loglisci, former Liberal Party Chair Ray Harding, and investment advisor Saul Meyer. In addition, Julio Ramirez, an unlicensed placement agent associated with Wetherly Capital, and Wissman have both pled guilty to Martin Act securities fraud charges for conduct related to the pension fund. Morris, Loglisci, Meyer, and Harding are presumed innocent until they are proven guilty in court.

Cuomo also issued subpoenas last month to over 100 investment firms and their agents after his investigation found that 40 to 50 percent of agents obtaining investments from New York pension funds were unregistered.

Today’s announcement arises from a two-year, ongoing investigation into corruption involving the New York State Comptroller’s Office and the Fund. The charges to date allege a complex criminal scheme involving numerous individuals operating at the highest political and governmental levels under former Comptroller Alan Hevesi, in which the New York state pension fund was used as a piggy bank for the Comptroller’s chief political aide and a favor bank for political allies and other friends.

The investigation is being conducted by Stacy Aronowitz, Deputy Chief of the Public Integrity Bureau, and Assistant Attorneys General Emily Bradford, Rachel Doft, Noah Falk, and Amy Tully, under the supervision of Ellen Nachtigall Biben, Special Deputy Attorney General for Public Integrity, and Linda A. Lacewell, Special Counsel, and with the assistance of Richard Jackson, Assistant Solicitor General.