This PE Scandal Has Legs

It’s déjà vu, all over again. Ten years ago, the State of Connecticut was rocked by Treasurer Paul Silvester’s kickback scheme, in which private equity and other investment firms made under-the-table payments in exchange for receiving fund commitments from the state pension system. The result was jailtime for Silvester, a total reworking of the state’s private equity portfolio and fines for several of the involved private equity firms.

Now we have a very similar situation going on just a few miles south, with New York Attorney General Andrew Cuomo indicting two top advisors to former NY state comptroller Alan Hevesi, on charges that include fraud, bribery, money laundering and larceny. The two men – David Loglisci and Henry “Hank” Morris – are accused of taking kickbacks from private equity firms, in exchange for fund commitments from New York Common Retirement Fund, the nation’s third-largest public pension fund with around $122 billion in assets under management. Loglisci was originally Common’s alternative investment officer, before being promoted to CIO. Morris worked at a “placement firm,” which allegedly acted as a dishonest gatekeeper.

The 128-page complaint — and a related SEC civil suit — does not allege any wrongdoing by the private equity firms that paid Morris, and several of the firms say that they’ve been told they are not subjects of the investigation. Among the firms named (either directly or via affiliates) are: The Carlyle Group, Aldus Equity, Ares Management, Falconhead Capital,Levine Leichtman Capital Partners, Lion Capital, GKM Newport, Ivy Asset Management, Odyssey Investment Group, Quadrangle Group,Pacific Corporate Group, Paladin Capital Group and Pequot Private Equity.

• This is a story that is going to have major legs (both in this space and elsewhere). Cuomo has already said that more individuals or institutions are likely to be implicated. A particularly bad time to be involved in a scandal that involves the abuse of public trust.
• Cuomo’s press release on the indictments named seven private equity firms or PE firm affiliates. Notably absent was Quadrangle Group. Was this simply a random oversight, or was the AG trying to play nice with both the White House and Gracie Mansion (or wherever Bloomberg lives)?
• Many of the firms named were using large placement agents for their funds. Don’t such agents typically require exclusivity? Were exceptions made? If so, why?
• What else did the Connecticut and NY systems have in common? Single fiduciaries. Just a recipe for corruption.
• Email from a smallish NY buyout pro: “When I was fundraising, this Loglisci guy spoke to me like some kind of condescending pimp. Now I’m kinda surmising small funds didn’t move his personal needle.”