California firms ban placement agents

Ares Management and Freeman Spogli & Co. have signed on to New York Attorney General Andrew Cuomo’s code of conduct which prohibits the use of placement agents, in relation to fees they paid to Wetherly Capital which were used to illegally secure investments from a New York pension fund.

Los Angeles-based Ares Management and Freeman Spogli & Co. have become the latest private equity players to adopt New York Attorney General Andrew Cuomo’s code of ethics prohibiting the use of placement agents. Eleven private equity firms have now signed onto the code, adoption of which Cuomo has used as a punitive measure for firms that were involved, directly or tangentially, in an unfolding pay-to-play scandal at the $109 billion New York State Common Retirement Fund (CRF).

Cuomo’s Pubic Pension Fund Reform Code of Conduct bans investment firms from using or compensating placement agents, lobbyists or other third-party intermediaries in obtaining investments from public pensions. It also enhances conflict of interest policies, and prohibits firms from doing business with a pension fund for two years if they have made a campaign contribution to a politician who can influence the fund’s investment decisions.

While Ares and Freeman are not accused of any wrongdoing, both firms obtained investments from the fund after retaining Wetherly Capital Group as a placement agent. Wetherly allegedly made under-the-table payments to finders to secure commitments from CRF.

The pension fund committed $50 million each to the firms in 2003 and 2004, with Ares and Freeman subsequently paying more than $1 million in placement fees to Wetherly. The placement agent then allegedly split these fees with Henry Morris, a paid political adviser for former New York comptroller Alan Hevesi. Wetherly also contributed $14,000 to Hevesi’s re-election campaign.

Both Morris and Hevesi face multiple pending charges, while earlier this month Wetherly became the first placement agent to settle with Cuomo’s office by agreeing to pay more than $1 million in restitution to the CRF and exiting the placement business. Neither Ares nor Freeman Spogli will have to pay any financial penalty as they were unaware of Wetherly’s alleged under-the-table payments, Cuomo said.

The Carlyle Group, Riverstone Holdings and HM Capital Partners are among the other private equity firms who have adopted the code of conduct and agreed to pay back a combined total of $120 million to the New York Common pension. 

Meanwhile, the California Public Employees’ Retirement System (CalPERS) – which created its own placement agent disclosure policy in response to the pay-to-play scandal – has released a list of 11 firms in which it has invested that have not responded to requests for voluntary disclosure about their relationships with the placement agents. CalPERS initiated a “special review” in October of fees paid by its managers to placement agents, following revelations that placement agent Alfred Villalobos was paid more than $70 million by investment firms over a five-year period for his work in securing investments from CalPERS.

According to CalPERS, the following firms have not responded to its requests: EnerTech Capital, Fenway Partners, GTCR, Information Technology Ventures, Markstone Capital, Pinnacle Ventures, Ripplewood, TSG Capital, Stark Investments, AREA Property Partners and Page Mill Advisors.

In December CalPERS also voted to sponsor state legislation to treat placement agents who solicit public pension funds as lobbyists, which would lead to a ban on success fees. The legislation would require placement agents to register as lobbyists in accordance with the Political Reform Act and prohibit them from receiving compensation that is contingent upon the outcome of any investment activity, as well as require agents to attend an ethics class every two years.