Cuomo Treads Where SEC Failed on ‘Pay-to-Play’ Rules

(Bloomberg) -- New York Attorney General Andrew Cuomo raised the stakes in his attack on “pay-to-play” in the public pension-fund market as Carlyle Group agreed to a $20 million settlement that limits campaign contributions to officials who oversee state money.

Carlyle, the world’s second-largest private-equity firm, also agreed yesterday not to use placement agents to solicit investment business from public retirement plans nationwide. It is the first money manager to adopt Cuomo’s new “code of reform” for the municipal-pension market, though it probably won’t be the last, said Elizabeth Nowicki, a professor at Tulane University Law School in New Orleans.

While New York state has already banned the use of placement agents, Cuomo has gone a step further. The code he seeks to have adopted industrywide prohibits money managers from doing business anywhere in the country with a public pension plan for two years after making political donations to officials who can influence the fund’s investment decisions. The U.S. Securities and Exchange Commission proposed similar restrictions in 1999, though it backed off amid opposition from the investment industry and politicians.

“The onus is going to be on the private-equity firms to really market their results,” Nowicki said. “They need to go out and get business the old-fashioned way.”

Under the SEC’s 1999 proposal, investment advisers would have been barred from managing pension money for two years after making a political contribution. The measure also would have required money managers with government clients to keep records of their contributions. SEC Chairman Mary Schapiro said April 21 that the agency is re-evaluating those rules.

No Criminal Charges

Carlyle executives will not be subject to any criminal liability under the settlement, Cuomo said yesterday at a press conference. Founded by David Rubenstein with William Conway and Daniel D’Aniello in 1987, the firm manages about $85.5 billion in assets, second in the private-equity industry to Blackstone Group LP of New York.

Cuomo said yesterday he also is investigating Riverstone Holdings LLC, a New York-based private-equity firm that has a joint venture with Carlyle. Funds managed by Carlyle alone or with Riverstone received about $730 million in investment commitments from the New York fund. Riverstone declined to comment.

“This is a revolutionary agreement,” Cuomo, 51, said. “It ends pay-to-play. It bans the selling of access. It puts the political power brokers out of business.”

The Public Pension Fund Code of Conduct is the latest such rulebook developed by Cuomo’s office, which has also created codes of conduct for the student-loan, Web-access and health- insurance industries.

Cuomo’s Style

“A pattern is emerging where Cuomo gets a major player in an industry to agree to a settlement or a code of conduct and the rest of the industry tends to follow,” said Jacob Zamansky, principal of Zamansky and Associates, a securities law firm in New York. “It appears to be a successful strategy which will continue.”

Asked how soon to expect other settlements in the pension probe, Cuomo said he had brought “a number of criminal and civil cases and we will have more over the coming weeks.”

Cuomo typically also seeks legislation to help bring about reforms. In the case of the student-loan industry, New York passed a law aimed at ending the conflicts of interest. U.S. Congress passed a law modeled on New York’s.

Task Force

Cuomo began to investigate the $122 billion New York State Common Retirement Fund about two years ago. Since then, his probe has expanded beyond New York and a multistate task force was formed. His office and the SEC say they are investigating money managers and their placement agents who used ties to public officials and kickbacks to buy and sell access to the $2 trillion in U.S. public pension systems.

Quadrangle Group LLC and Odyssey Investment Partners are among the firms whose public investment contracts are being investigated by Cuomo and the SEC.

“These problems have existed for quite some time and they didn’t get the attention because the amounts of capital committed to private equity were relatively insignificant,” said David De Weese, a partner with private-equity firm Paul Capital Partners in New York. His firm manages about $7 billion in assets and doesn’t use placement agents.

“Talking directly to investors and building those relationships is a good thing,” he said.

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