The US Securities and Exchange Commission has sued a former New York pension chief investment officer as well as a political consultant with allegedly running a scheme to collect sham “finder’s fees” from private equity firms looking for commitments from the pension.
David Loglisci, the former deputy comptroller and chief investment officer of the $153 billion New York State Common Retirement Fund, and Henry Morris, previously a top political advisor to former New York State Comptroller Alan Hevesi, have been charged with running the alleged fraud scheme by the SEC.
The two also have been indicted by New York’s State Supreme Court on criminal charges including enterprise corruption and money laundering.
In many such instances, the investment management firm personnel also knew, or were at least reckless in not knowing, that Loglisci would not approve the proposed investment absent an agreement to pay Morris or certain other persons.
The SEC alleges Loglisci directed the pension to invest billions of dollars with private equity firms and hedge fund managers who paid millions in sham “finder’s fees” to win investments from the fund. Loglisci allegedly made sure investment managers that made the appropriate payments to Morris, and other designated recipients, were rewarded with commitments.
Morris allegedly made $15 million from the scheme, which ran from 2003 through 2006. Loglisci also personally benefitted from the operation by obtaining funding from Morris and the principal of a private equity firm for a low-budget film he and his brothers produced call “Chooch”.
Loglisci left the pension in May 2007, before the investigation began, according to a pension spokesman. New York’s Comptroller Thomas DiNapoli said he is “outraged” by the alleged wrongdoing. He said the pension has implemented reforms to strengthen oversight.
“These indictments send a clear message: abuse of the pension fund by those entrusted with its management will not be tolerated,” DiNapoli said in a statement.
No private equity firms were named as defendants in the case, but a number were identified as having been caught up in the scheme: Carlyle/Riverstone Global Energy and Power Fund II; Aldus Equity Partners; Falconhead Capital Partners II; Odyssey Investment Partners; Access Capital Partners; GKM Newport Management; Paladin Capital Group's Paladin Homeland Security Holdings; Pequot Capital Management and PCG Capital Partners. The criminal complaint also names Freeman Spogli & Company; Ares Management; Levine Leichtman Capital Partners; Quadrangle Group; Hicks Muse Tate & Furst (now HM Capital) and Lion Capital.
The SEC said some of the private equity and hedge funds willfully ignored corrupt relationship between Loglisci and Morris, or “recklessly” did not understand what was happening.
“In many such instances, the investment management firm personnel also knew, or were at least reckless in not knowing, that Loglisci would not approve the proposed investment absent an agreement to pay Morris or certain other persons,” the complaint states.
“Although Loglisci knew the true purpose of the payments at issue, neither he nor Morris, nor the investment management firms that made the payments, disclosed the true nature of the payments or the underlying arrangements to the retirement fund’s investment advisory committee,” the complaint states.
In one example, Carlyle/Riverstone Global Energy and Power Fund II received a $500 million commitment from NY Common in exchange for a $10 million payment to Morris between 2004 and 2007. The SEC noted that Carlyle retained Morris “even though Carlyle had its own in-house marketing operation”.
Carlyle agreed to pay a Morris entity 2 percent of any capital commitments the Carlyle/Riverstone fund received from the New York pension. A Riverstone executive also personally invested $100,000 in Loglisci’s movie, “Chooch”.
Carlyle said it is fully cooperating with the SEC and is not a target of the investigation. A person familiar with the matter said Carlyle disclosed the payments to the pension “as required by law”.
A former PCG executive worked with an executive from Clinton Group, a hedge fund management firm, to set up a joint venture fund of funds to invest NY Common money in private equity, according to the complaint. The executives from PCG and the Clinton Group agreed to cut Morris and another designated invdividual in on the profits from the joint venture, known as Strategic Co-Investment Partners, the complaint states. Morris and the designated individual split a 10 percent management fee from the enterprsie, eventually totalling $1.26 million, while Loglisci “arranged” for the pension to invest $750 million in the joint venture.
PCG is a victim in the case and is not a target of the investigation, according to David Fann, president and CEO of PCG Asset Management.
“PCG provided information that was instrumental to the government and is proud of its role in assisting in this investigation,” Fann said in an email statement. The “PCG executive” mentioned in the SEC complaint “has not worked at PCG for over 2.5 years”, Fann said.
The case is reminiscent of a similar lawsuit that saw Connecticut’s former treasurer Paul Silvester sent to prison in 2001 for directing sham finder’s fees to associates.