The Carlyle Group will pay New York $20 million and adopt a “code of conduct” governing placement of funds to “resolve its role” in a wide-ranging pay-to-play scandal that has rippled through the private equity industry.
Carlyle is one of many private investment firms named as players in the scandal since Andrew Cuomo, New York’s attorney general, and the US Securities and Exchange Commission first filed charges related to the scandal in March. Carlyle has not been charged with any wrongdoing.
Carlyle engaged Searle, a company affiliated with Henry Morris, a former political operative who allegedly headed up the kick-back scheme, to serve as a placement agent for potential investments from the $122 billion New York State Common Retirement Fund. The relationship led to Carlyle obtaining $730 million in total investments from New York Common in Carlyle and Carlyle/Riverstone funds. In exchange, Carlyle paid Searle about $13 million.
Searle paid the bulk of the placement fees received from Carlyle to PB Placement, a shell company allegedly controlled by Morris, according to Cuomo. Morris had allegedly entered a fee-splitting agreement with Barrett Wissman, former head of a hedge fund, from the Carlyle relationship, an arrangement Carlyle was unaware of. Wissman has also been indicted in the scandal.
Morris, who has been indicted, also allegedly worked with David Loglisci, former chief investment officer of the New York Common, to collect sham finder’s fees. Loglisci is charged in the scheme.
Carlyle disclosed its retention of Searle to New York Common and “was unaware of any improper conduct by Searle or Morris”, Carlyle said in a statement Thursday. “Carlyle was victimised by Morris’ alleged web of deceit.”
The firm, led by David Rubenstein, plans to sue Searle and Morris for damages of more than $15 million “for the harm their wrongful actions have caused Carlyle. This amount reflects fees paid to Searle and other damages”.
Cuomo did not comment about why the firm was not charged in the case. Financial advisor Aldus Equity was indicted on civil charges by the SEC, and its founder, Saul Meyer, was charged criminally for his role in the scandal. Aldus allegedly paid Morris and another individual a percentage of fees it collected as part of its contract to run the New York Common emerging managers’ fund.
Some of the transactions that resulted from Morris’ interaction with Carlyle include a $150 million commitment to Carlyle/Riverstone Global Energy & Power Fund II made in November 2003. In that case, Searle was paid $3 million in fees, $1.4 million of which went to PB Placement and $1.5 million of which went to Wissman. Also, Carlyle/Riverstone Renewable Energy Infrastructure Fund I received $30 million from New York Common in 2005. Searle was paid $600,000 in fees for the investment, of which about $285,000 went to PB Placement.
As part of the resolution, Carlyle adopted a code of conduct created by Cuomo that bans investment firms from “hiring, utilising or compensating” placement agents, lobbyists or other third-party intermediaries to communicate or interact with public pension funds to obtain investments.
The code prohibits investment firms and its principals and employees from doing business with a public pension fund for two years after the firm or individuals connected to the firm make campaign contributions to public officials who can influence the fund’s investment decisions. The campaign contribution rule also applies to investment firms currently doing business with the state pensions.
The code also calls for investment firms to disclose any conflicts of interest to pension officials or law enforcement to enhance transparency.
“For 22 years, Carlyle has served the interests of investors the world over, seeking to provide superior returns to public and private pensioners,” the firm said in a statement. “Maintaining our good name and the reputation of our investors has always been our highest priority.”