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Carlyle in USD 20 Million Settlement in New York Pension Fund Kickback Investigation

While the investigation into illegal kickbacks paid by private equity funds to "placement agents" who secured employee pension fund investments continues, Carlyle has entered into a USD 20 million deal with the State of New York.

The May 14 announcement by New York Attorney General Andrew Cuomo gives a concise analysis of the way the system operated to siphon huge chunks of money from the New York State Common Retirement Fund (“the CRF”):

Under the terms of today’s agreement, Carlyle will adopt Cuomo’s Public Pension Fund Code of Conduct. The code of conduct bans investment firms from hiring, utilizing, or compensating placement agents, lobbyists, or other third-party intermediaries to communicate or interact with public pension funds to obtain investments. To avoid pay-to-play schemes, the Code prohibits investment firms (and their principals, agents, employees and family members) from doing business with a public pension fund for two years after the firm makes a campaign contribution to an elected or appointed official who can influence the fund’s investment decisions. This provision would also bar all firms currently doing business with the pension fund from making such campaign contributions. Investment firms must also disclose any conflicts of interest to public pension fund officials or law enforcement authorities, to increase transparency and avoid abuse of the fund for personal gain.

As a part of the agreement, Carlyle will pay $20 million to the State of New York to resolve its role in the Attorney General’s ongoing investigation into corruption at the CRF.

The Attorney General’s investigation revealed that in 2003, Carlyle, at the suggestion of a partner, retained Henry (“Hank”) Morris, the chief political aide to then Comptroller Alan Hevesi, as a placement agent to help obtain investments from the CRF. Prior to retaining Morris, Carlyle had experienced limited success in obtaining investments from CRF. However, after retaining Morris, Carlyle obtained approximately $730,000,000 in total investment commitments from CRF in Carlyle funds and Carlyle/Riverstone funds. In exchange, Carlyle paid Searle & Company, the broker-dealer associated with Morris, nearly $13,000,000.

Searle then paid the lion’s share of placement fees received from Carlyle to PB Placement, LLC, a shell company controlled by Morris. Unbeknownst to Carlyle, Morris had allegedly entered into a fee-splitting arrangement to pay Wissman half of all these fees. The investment commitments made by CRF and the related fees paid to Searle and others included:

A $150,000,000 commitment to Carlyle/Riverstone Global Energy & Power Fund II, L.P. made in November of 2003 for which Searle was paid $3,000,000 in fees, $1,425,000 of which went to PB Placement and $1,500,000 of which went to Wissman;
A $100,000,000 commitment to Carlyle Realty Partners IV-A, LP made in April of 2005 for which Searle was paid $1,250,000 in fees, $1,187,500 of which went to PB Placement;
A 80,000,000 Euro commitment to Carlyle Europe Real Estate Partners II, L.P. made in September of 2005, for which Searle was paid $1,158,382 in fees $1,098,160 of which went to PB Placement;
A $350,000,000 commitment to Carlyle/Riverstone Global Energy & Power Fund III, L.P. made in October of 2005 for which Searle was paid $7,000,000 in fees, $3,325,000 of which went to PB Placement and $3,500,000 of which went to Wissman; and
A $30,000,000 commitment to Carlyle/Riverstone Renewable Energy Infrastructure Fund I, L.P. through CRF’s fund-of-fund, The Hudson River Fund II, L.P. made in December of 2005 for which Searle received $600,000 in fees, $285,000 of which went to PB Placement and $300,000 of which went to Wissman.
In addition, soon after the CRF’s $150,000,000 investment in Carlyle/Riverstone Global Energy & Power Fund II, a principal of Riverstone — Carlyle’s joint venture partner — made an “investment” of $100,000 in Chooch, a film produced by the brother of then Chief Investment Officer to Comptroller Hevesi, David Loglisci. Carlyle was unaware of that investment and the investment was not disclosed to the CRF. Carlyle employees also made approximately $78,000 in campaign contributions to Comptroller Hevesi’s campaign between January 2005 and October 2006, some of which were solicited directly by Morris.

Several of the Carlyle investments are alleged as the basis for Martin Act and other charges in the 123-count indictment returned by the grand jury and filed by Cuomo’s office in March against Morris and Loglisci.

Carlyle is one of the world’s largest private equity firms, with over $85.5 billion under management. Carlyle manages 66 funds and operates out of offices in 20 countries in North America, Europe, Asia, Australia, the Middle East/North Africa and Latin America. Carlyle’s principal executive offices are located in Washington, D.C.

The California public employees pension fund CalPERS, the largest US public employees pension fund, in 2007 actually bought a direct 5% stake in Carlyle, alongside a 10% stake in Apollo Management (see Growing Pension Fund Stakes Feed PE Search for 'Permanent Money' on this site.