New York State prosecutors and the Securities and Exchange Commission are investigating whether the Carlyle Group, one of the nation's largest and most politically connected private equity firms, made millions of dollars in improper payments to intermediaries in exchange for investments from New York's state pension fund, according to two people with direct knowledge of the case.
The inquiry, which is examining the activities of a number of investment companies, focuses on what has been a widespread practice among hedge funds and private equity firms - paying so-called placement agents to gain business managing the pension funds run by states for public employees. Such payments often raise questions about conflicts of interest and concerns that they lead placement agents to bribe public officials.
The Carlyle Group, which over the years has employed George H. W. Bush and the former British prime minister John Major, is among the most prominent of the firms under scrutiny, and manages $1.5 billion of the state's pension assets. Carlyle's efforts to gain pension business in other states have drawn criticism before, but company officials have never been charged with any wrongdoing.
Investment firms escaped charges in a 123-count indictment brought by Attorney General Andrew M. Cuomo last month against two aides to the former state comptroller, Alan G. Hevesi, who were accused of selling access to the state's $122 billion pension fund and reaping millions of dollars for themselves. The S.E.C. brought a parallel action against the two aides, accusing them of violating several securities laws.
Investigators are now scrutinizing the role played by several firms for potential civil charges, the people with knowledge of the case said, speaking on condition of anonymity because the investigation is continuing.
One likely issue will be determining whether investment firms properly disclosed their relationship with one of the aides, Hank Morris, a former top political adviser to Mr. Hevesi who was typically paid through a Connecticut firm, Searle & Company.
Carlyle has denied any wrongdoing in the case.
"Carlyle has fully cooperated with the New York attorney general's investigation," said Christopher Ullman, a spokesman for the firm. "We understand this is an industrywide investigation and that we are not the focus of the investigation."
Carlyle was among more than a dozen firms mentioned in the March 19 indictment of Mr. Morris and David Loglisci, who served as Mr. Hevesi's chief investment officer.
Other firms mentioned included Pequot Capital, the prominent hedge fund; Quadrangle Group, a private equity fund; and H M Capital, the Texas investment firm formerly known as Hicks, Muse, Tate & Furst.
Asked at the time of the indictment why investment firms were not charged, Mr. Cuomo said there were more chapters to come.
"This is the first of several cases and developments that will be announced on this matter," Mr. Cuomo said at the time.
Mr. Cuomo's office and S.E.C. officials declined to comment on Monday. Mr. Morris and Mr. Loglisci have denied wrongdoing.
The competition among investment firms to manage pension funds is intense; the firms typically make millions of dollars in management fees from the arrangements. New York State's fund is among the nation's largest.
The March indictment accused Mr. Morris and Mr. Loglisci of pressuring the investment firms to do business through Searle,, which in turn paid Mr. Morris millions of dollars. It also alleged that Mr. Morris helped Mr. Loglisci by securing him a promotion within the comptroller's office and by investing $100,000 in a low-budget movie Mr. Loglisci produced with his brothers called "Chooch." Mr. Hevesi, who resigned in late 2006 after pleading guilty to an unrelated felony, has not been charged in the case.
In its complaint, the S.E.C. said at least some investment firms - which the agency did not name - were well aware of what the agency called "a fraudulent scheme to extract kickbacks" and made "sham" payments "pursuant to undisclosed quid pro quo arrangements."
"In many such instances, the investment management firm personnel also knew, or were at least reckless in not knowing, that Loglisci would not approve the proposed investment absent an agreement to pay Morris or certain other persons," the agency said.
The Carlyle deals are among the most complex described in the court filings. One deal involved an energy fund run by Carlyle and another firm, Riverstone Holdings. As part of the arrangement, the firms paid $10 million to Searle, nearly half of which was funneled to Mr. Morris, according to the S.E.C. complaint, and a top Riverstone executive also invested $100,000 in "Chooch," the complaint said.
Jeff Taufield, a spokesman for Riverstone Holdings, said, "Riverstone and its executives have cooperated fully," adding, "we are neither a target nor a subject of the investigations."
Mr. Ullman of Carlyle said, "Our agreements with placement agents, whether large Wall Street firms or smaller broker-dealers, call for all parties to abide by all laws to ensure the integrity of the investment process."
Carlyle's pursuit of pension money has become controversial before.
In Connecticut, Carlyle gained entrÃ©e to the state pension in the late 1990's by hiring Wayne L. Berman, an influential Washington lobbyist, who then worked for the consulting firm Park Strategies.
At a 2003 corruption trial, Paul J. Silvester, the former Connecticut state treasurer, testified that Mr. Berman discussed a lucrative job for him at Park Strategies at the same time Mr. Berman was seeking business on behalf of Carlyle. The pension fund invested tens of millions of dollars with Carlyle, and soon after the deal Mr. Silvester left state service to take the job at Park. He later spent four years in jail after pleading guilty to federal charges that included racketeering and conspiracy.
Gregory Vistica, a spokesman for Mr. Berman, said he "was never interviewed by the F.B.I. or the U.S. attorney, was never the subject of a grand jury subpoena, was never considered a person of interest, and most importantly, was never charged."
In Illinois, Carlyle paid millions of dollars in fees to Robert Kjellander, former treasurer of the Republican National Committee, to generate business from the Illinois Teachers' Retirement System. The state has since prohibited such fees.
Mr. Ullman of Carlyle said his firm was "pleased to currently serve the pensioners of New York, Illinois and Connecticut and has achieved excellent returns in several funds on their behalf."
- 106 Money & Politics
- 208 Regulation