Shifting shape(3)

A new document from the New York attorney general reveals PCG saw its share of economics in a controversial co-investment vehicle drop dramatically after an employee switched to another firm and took control of the fund’s management. Chris Witkowsky explores.

For gatekeeper Pacific Corporate Group, a potentially lucrative $750 million joint venture with the New York State Common Retirement Fund has instead provided its share of disappointments.

Last week, the firm turned over $2 million to New York Attorney General Andrew Cuomo that the attorney general considers “restitution” to the pension. PCG affiliate PCG Capital Partners was involved in the joint venture, called Strategic Co-Investment Partners, that is accused of having kicked back fees to Henry Morris, a former political operative charged with collecting sham finders’ fees for commitments from the pension. PCG is not charged with any wrongdoing and Cuomo said the firm did not know about the secret kickbacks.

PCG said the settlement would allow it to move forward from the “improper actions of a former executive”, whom it declined to name.

Still, no firm enjoys being associated with the ongoing pay-to-play scandal in the US.

Aside from potential reputational damage, PCG has also seen its profits disappear from the co-investment fund. To date, SCP has made $14.5 million in fees and carried interest on the management of New York Common’s fund, and of that $14.5 million, PCG has collected about $2.1 million in management fees, Cuomo said. The $2 million settlement essentially wiped out its profits to date. But even before the settlement, the firm had seen its share of the future proceeds in Strategic Co-Investment Partners  plummet at the same time that one of its former executives left the firm.

According to the attorney general, in 2006, on the eve of the $109 billion New York State Common Retirement Fund committing $750 million to SCP, four PCG executives left the San Diego firm.  They were not named in Cuomo’s complaint, but around that time PCG executives Monte Brem, Steve Moseley, Tara Blackburn and Michael Russell all resigned. Brem went on to form rival gatekeeper StepStone Group, which Moseley joined in February 2008. He recently resigned citing “unfair and unnecessary distraction” from media reports connecting him to the pension scandal. He said in May that he is not a target of Cuomo’s investigation.

Upon leaving PCG, Moseley joined Estes Management, the private equity arm of hedge fund the Clinton Group. The Clinton Group was a partner in SCP, along with Texas hedge fund manger Barrett Wissman, through an entity called W Investment Strategies, according to Cuomo, who alleges the economics of SCP fund changed just after the PCG executive joined the Clinton Group.  The complaint alleges that the then-chief investment officer of New York Common, David Loglisci, encouraged the PCG executive – who remains unnamed in the complaint and has not been charged – to leave and join Clinton Group. Loglisci, who like Wissman has been indicted in the scandal, is described by Cuomo as a “family friend” of Wissman.

The original SCP profit-sharing structure was such that PCG Capital Partners would have collected 45 percent of the fees and other economics from SCP, with the Clinton Group receiving 45 percent and W Investment receiving 10 percent, according to the complaint. After the former PCG executive switched over to Clinton Group, however, the hedge fund’s private equity arm stood to gain 70 percent of the proceeds of the joint venture, with PCGCP’s cut dropping to 20 percent and Wissman still receiving 10 percent, Cuomo alleges. The attorney general’s complaint does not make clear why the change was made, nor which parties pressed for it.

The joint venture was created with the intention of paying out hidden fees right from the start, Cuomo said. The attorney general has said the unnamed executive with PCGCP was allegedly told that Morris would be a “concealed participant in the deal” and get a cut of the proceeds. The complaint notes the founder and current chairman and chief executive of PCG, Christopher Bower, did not have knowledge of Morris’ involvement in the fund.

So far, Cuomo has reached settlements with Carlyle, Riverstone and PCG, taking monetary payments and pledges on his code of conduct. And the investigation rolls on. It’s hard to tell who will be next, but for now, PCG’s chapter in the whole sordid tale seemingly has come to a close. As the firm said, it’s time to start fresh and move on.