Governance foiled by human folly at NY state fund

The third largest fund in the US, the $122 billion New York state pension fund, has recently been embroiled in a tale of greed, fraud, bribery and corruption, with a number of its alternative investment funds allegedly tainted by the wrong-doing of former employees of the state comptroller’s officer, including its former CIO.

In this week’s “Have Your Say” column we ask you to consider the transparency of the investments in this sector, and have your say on how funds can better monitor their investments and the people that manage them.

An ongoing investigation, already two years old, has seen 123 charges laid against former employees of the New York State Comptroller’s office – the sole trustee of the State Pension Fund – including enterprise corruption, money laundering, securities fraud, grand larceny and bribery.

Hank Morris, former chief political adviser, and David Loglisci, former chief investment officer, have been charged with conspiring to sell access to billions of taxpayer dollars in exchange for millions of dollars in kickbacks.

It is alleged that Morris received more than $30 million in fees for himself and his business partners on investments which he had a role in approving, and that the two of them ran a pay-to-play scheme in which investment firms had to kick back part of their fees to get work with the New York pension fund. The payments allegedly went to Morris, who then distributed the money.

In one of the more outlandish allegations, it is alleged Loglisci steered hundred of millions of dollars worth of investment deals to Morris and to favoured firms, and accepted hundreds of thousands of dollars worth of benefits in the form of sham “investments” for the production by his brother of a low budget movie, “Chooch”.

According to the New York Attorney General’s office, more than 20 investment deals were allegedly tainted by the defendants kick-back schemes and fraudulent self-dealing, including:

• Access/NY European Fund, a captive fund of funds with almost $600 million in capital commitments from the State pension fund, generating over $2.3 million in sham management fees for Morris and his partner. Morris’s role was allegedly concealed from Access.
• Aldus New York Emerging Fund, a captive fund of funds with $375 million in capital commitments from the State pension fund, generating $262,000 in sham management fees for Morris. Aldus Equity Partners, L.P. is also an outside consultant and fiduciary to the State pension fund on private equity transactions. Morris secured this mandate for Aldus after having blocked Pharos from receiving the mandate when a principal of Pharos Capital Group, LLC, refused to pay Morris or his partner. Morris then caused Aldus to invest in other funds on which Morris also obtained sham placement fees.
• Five investments involving The Carlyle Group, one of the world’s largest private equity funds, totalling approximately $730 million in capital commitments from the State pension fund. Morris and his partner obtained over $13 million in sham placement fees.
• GKM/NY Venture Capital Fund, a captive fund of funds with $800 million in capital commitments from the State pension fund. Morris and his partner, a political crony of Hevesi, obtained over $650,000 in sham placement fees.
• Olympia John Street Fund LP, a hedge fund with $900 million in capital commitments from the State pension fund, generating over $6.6 million in fees for Morris and his partner.
• Paladin Homeland Security Fund (NY), a $20 million private equity fund, generating $300,000 in sham placement fees for a political crony of Hevesi. That person also received hidden fees of over $500,000 in connection with Pequot Diversified Offshore Fund/Pequot Private Equity Partners Fund IV, which had a combined commitment of $110 million from the State pension fund.
• Strategic Co-Investment Partners, a co-investment fund with $750 million in capital commitments, the largest capital commitment by the State pension fund at the time. This generated over $1.2 million in sham management fees for Morris’s partner, with Morris as a secret partner.

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