The New Mexico Educational Retirement Board (NM ERB) and the New Mexico State Investment Council (NM SIC) have both temporarily suspended operations with consultant Aldus Equity, citing concerns about the Dallas-based advisory firm’s connection to an alleged kickback scheme involving the emerging manager program it runs for the $120 billion New York State Common Retirement Fund.
NM ERB is suspending both Aldus’s $75 million co-investment mandate, made in July, and the consulting relationship, pending a review, said Bob Jacksha, CIO. Spurred by the New York scandal, the $6.6 billion NM ERB is conducting a comprehensive review of all of its contracts for consulting and investment management services. The review will encompass all contracts for professional services and alternative investment fund commitments, including private equity, hedge funds, real estate, infrastructure and timber investments, that have been placed since 2000 and will take several weeks to complete, said Jacksha.
Meantime, the $16 billion NM SIC also suspended Aldus, which has served as its private equity consultant since late 2003. NM SIC spokesman Charles Wollmann stated that the decision to suspend Aldus came after the limited partner received information from The Carlyle Group and Quadrangle Group that those firms had used placement agent Hank Morris, who has been charged in the New York case with taking millions of dollars in kickbacks from money manager firms, including Aldus. According to the SEC complaint, Aldus began a relationship with Morris in May 2004. “Hank Morris showed up as a placement agent in two different private equity funds that we invested in,” Wollmann told Buyouts.
The funds in question were Carlyle Group’s inaugural mezzanine fund, Carlyle Mezzanine Partners LP, to which NM SIC committed $20 million in 2005 and which closed in 2006 with total commitments of $436 million. Carlyle paid a fee for this commitment of $150,000 to Searle & Co., a company controlled by Morris. Quadrangle also used Searle in its effort to secure a $20 million pledge from the LP in 2004 for the $2 billion Quadrangle Capital Partners II LP fund, which closed in 2005. However, a source close to Quadrangle said that although Searle was used as a placement agent for that fund, it was not paid a fee. Aldus recommended both of those pledges to the NM SIC.
“Pending further review of this information and a little bit more exploration of those relationships, we decided to put the relationship with Aldus on hold,” said Wollmann. He added that they are in an “assessment phase,” awaiting more information from some of their investment managers on whether they used placement agents or marketers. “We are aggressively pursuing this because the issues in New York are a matter of concern to us,” added Wollmann. Although Aldus, Carlyle and Quadrangle have all been mentioned in connection with the New York kick-back scheme, none has been charged with wrongdoing. Carlyle and Quadrangle declined to comment.
In response to the NM SIC suspension, Gregory O’Shea, Aldus’s CFO, wrote to Gary Bland, the NM SIC’s state investment officer, “Your letter conveying the SIC’s decision to suspend Aldus came as a surprise, and we are very disappointed by the decision.”
The complaint filed by the Securities and Exchange Commission on March 19 questions why Aldus hired a “finder” when it was already a consultant for the New York state pension fund, and why it evidently was induced to steer money to particular fund managers. According to the complaint, Morris, chief fundraiser for Alan Hevesi, the former New York state comptroller, hired Aldus to oversee its emerging manager program and then told an unnamed Aldus managing partner that the firm must use Morris as a “finder” before attaining pledges from the pension fund. The partner allegedly agreed that Aldus would recompense Morris after it became obvious the firm would not be used unless it paid him, according to the complaint.
Aldus responded to a request for comment about the NM ERB suspension with a lengthy statement: “Aldus principals are working 24-7 to address these issues with officials from New Mexico ERB and other clients. There are many misperceptions, and we will be diligent to communicate with current, prospective and past clients regarding the matter. It is important to note the SEC complaint and related charges are against Henry Morris, not Aldus. This firm terminated Morris in 2006 before any investigation began, and the partners find the allegations in the indictment to be shocking, disturbing and unsettling. It will be up to a New York jury to decide the issues, but be clear, Aldus had no knowledge of any back-dealing or double-representation by Morris or his associates. If the allegations are true, then we were lied to, and the behavior described is totally unacceptable.”