Pay to Play Scandal in NY Nabs Another Investment Firm
Riverstone Holdings settles with NY AG Cuomo as his nationwide probe continues.
June 11, 2009— -- The nationwide probe into the "pay-to-play" scandal involving Wall Street firms that paid politically-connected fixers to get them business from pension funds controlled by state officials has ensnared another investment firm. Calling the state government in New York "corrupt," the NY Attorney General Andrew Cuomo announced Thursday that Riverstone Holdings LLC will pay $30 million in restitution and has signed on to a new code of conduct that eliminates middlemen and lobbyists from the process of procuring hundreds of millions in investments from the state's pension fund.
The announcement was made against the backdrop of an almost farcical drama for power in the state's capital which one local newspaper, the New York Post, called a "Circus Maximus" where "bozos" battled for senate power. Cuomo acknowledged his office is watching the battle for control which is now entering the courts.
"We see the dysfunction of Albany on a daily basis," Cuomo said in response to a question on that issue. "Some days more clearly."
In the closely regulated and monitored world of public employee fund investment, the use of unregulated middlemen has been a loophole through which, in return for passing public funds to private firms, public corruption has at times resulted, Cuomo's office charges. Two people have already pled guilty as part of Cuomo's probe into the use of these middlemen.
"It is the system that is the problem," Cuomo said. "By the current design of the system it has created loopholes that people have exploited. Well why doesn't anyone change the system?" Cuomo asked, "because people are benefiting the system."
Riverstone, which reportedly has about $17 billion in assets under management, worked with the politically connected Carlyle Group three times beginning in 2003 on investment deals with the NY State pension fund. Carlyle settled with Cuomo last month for $20 million and also agreed to the new code of conduct eliminating the use of middlemen.
A spokesperson for Riverstone said Thursday that the settlement is best for their investors and the firm.
"Today, we have come to an agreement with the Office of the Attorney General whereby Riverstone has agreed to make a $30 million payment to the Office of the Attorney General for the benefit of the New York State Common Retirement Fund in resolution of this matter. Riverstone also has agreed to adopt the Attorney General's new Public Pension Fund Code of Conduct, which we believe provides for greater transparency, accountability and ethics in the solicitation of private equity commitments from the public pension fund community," said the spokesperson.
Cuomo said his investigation found that Riverstone had also used a firm associated with a powerful political fixer, Hank Morris, who is currently facing a 123 count criminal indictment on corruption charges that stem from his alleged activities in connection with pension fund investments.
Cuomo said that both Riverstone and Carlyle used a firm associated with Morris, and soon after both received hundreds of millions in investments from CRF.
"Carlyle/Riverstone retained Searle, a company associated with Henry ("Hank") Morris, the chief political aide to then Comptroller Alan Hevesi, as a placement agent to help obtain investments from the CRF [Common Retirement Fund]. Prior to retaining Searle, the companies had experienced limited success in obtaining investments from CRF. However, after retaining Searle, they obtained approximately $530,000,000 in total investment commitments from CRF in Carlyle/Riverstone funds. In exchange, Carlyle paid Searle over $10,600,000," Cuomo said in a statement released this morning.
Cuomo said his ongoing two year investigation outlines the scope of corruption in Albany. "In many ways that's the story of Albany, ongoing dysfunction, ongoing corruption," Cuomo said.
Cuomo said that an investigation into Riverstone Principal David Lucien remains open, and was not a part of the settlement agreement. "It is an open investigation," he said in a conference call.
"We have no comment on that," Michael Freitag, a spokesman for Riverstone.
Cuomo, widely rumored as a potential Democratic gubernatorial candidate, said his probe is designed to not merely bring individual cases but to fix the system.
"We seek justice in the individual cases and we seek to fix the problem," Cuomo said. Speaking of the system in which the state comptroller is the sole person responsible for allocating investments in the $109 billion New York Common Retirement Fund, Cuomo said, "The system is corrupt. It has been corrupt for many years."
Cuomo's 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, Cuomo said in a statement. It also bars all firms currently doing business with the pension fund from making such campaign contributions.
"Riverstone has not used a placement agent in connection with any investment by a state or municipal pension fund since early 2006, and we believe that our agreement to abide by the Attorney General's Code of Conduct reflects another step toward our goal of meeting or exceeding best practices," the firm noted in its statement," said the spokesperson for Riverstone.
Riverstone is an energy and power-focused private equity firm. Founded in 2000 it conducts buyout and growth capital investments in the midstream, exploration & production, oilfield services, power and renewable sectors of the energy industry, according to Cuomo's office and industry reports.
Cuomo's probe alleges "a complex criminal scheme involving numerous individuals operating at the highest political and governmental levels under former Comptroller Alan Hevesi, in which the New York state pension fund was used as a piggy bank for the Comptroller's chief political aide and a favor bank for political allies and other friends," he said. He declined to comment on whether current officials linked to the pension fund are under investigation.