POLITICIANS, PENSION FUNDS AND THE COMMON KICKBACK

Below is the summary of a very complicated kickback scheme involving Quadrangle Group and the New York Sate Common Retirement Fund. It is a really good example of how politicians and businessmen work so well together in America. Luckily, the SEC performed it’s policing duties quite well in this case which brought about a very large fine for Steve Rattner of the Quadrangle Group. The following is an excerpt from the SEC web page:

“Washington, D.C., Nov. 18, 2010 — The Securities and Exchange Commission today charged former Quadrangle Group principal Steven Rattner with participating in a widespread kickback scheme to obtain investments from New York’s largest pension fund.

The SEC alleges that Rattner secured investments for Quadrangle from the New York State Common Retirement Fund after he arranged for a firm affiliate to distribute the DVD of a low-budget film produced by the Retirement Fund’s chief investment officer and his brothers. Rattner then caused Quadrangle to retain Henry Morris – the top political advisor and chief fundraiser for former New York State Comptroller Alan Hevesi – as a “placement agent” and pay him more than $1 million in sham fees even though Rattner was already dealing directly with then-New York State Deputy Comptroller David Loglisci and did not need an introduction to the Retirement Fund.
The SEC alleges that after receiving pressure from Morris, Rattner also arranged a $50,000 contribution to Hevesi’s re-election campaign. Just a month later, Loglisci increased the Retirement Fund’s investment with Quadrangle from $100 million to $150 million. As a result of the $150 million investment with Quadrangle, the Retirement Fund paid management fees to a Quadrangle subsidiary. By virtue of his partnership interest in Quadrangle and its affiliates, Rattner’s personal share of these fees totals approximately $3 million.
Rattner agreed to settle the SEC’s charges by paying $6.2 million and consenting to a bar from associating with any investment adviser or broker-dealer for at least two years.
“New York State retirees deserve investment advisers that are selected through a transparent, conflict-free process, not through payoffs, undisclosed financial arrangements and movie distribution deals,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.
David Rosenfeld, Associate Director of the SEC’s New York Regional Office, added, “Rattner delivered special favors and conducted sham transactions that corrupted the Retirement Fund’s investment process. The assets of New York State workers were invested for the hidden purpose of enriching Morris and Loglisci’s brother.”
The SEC previously charged Morris and Loglisci for orchestrating the fraudulent scheme that extracted kickbacks from investment management firms seeking to manage the assets of the Retirement Fund. The SEC charged Quadrangle earlier this year.
According to the SEC’s complaint against Rattner filed in U.S. District Court for the Southern District of New York, Morris informed Rattner in the fall of 2003 that Loglisci’s brother was involved in producing a film called “Chooch.” Morris suggested that Rattner help Loglisci’s brother with the theatrical distribution of the film. Rattner met with Loglisci’s brother and agreed to assist him, but Rattner’s efforts did not lead to a distribution deal. Approximately one year later, Loglisci’s brother contacted Rattner about DVD distribution of “Chooch.” Within days of speaking to Loglisci’s brother, Rattner contacted Loglisci about investing in a new Quadrangle private equity fund being marketed by the firm. Rattner told Loglisci that he had arranged a meeting between Loglisci’s brother and a Quadrangle affiliate — GT Brands — to discuss a possible DVD distribution deal.
The SEC alleges that after Loglisci’s brother met with GT Brands and telephoned Rattner to complain about the treatment he had received from GT Brands, Rattner warned a GT Brands executive to treat Loglisci’s brother “carefully” because Quadrangle was trying to obtain an investment through Loglisci. After GT Brands made clear to Rattner that it was not interested in distributing the film, Rattner instructed the GT Brands executive to “dance along” with Loglisci’s brother. According to an e-mail, Rattner telephoned Morris to inquire whether “GT needs to distribute [the Chooch] video” in order to secure an investment from the Retirement Fund. Morris offered to “nose around” to determine how important the DVD distribution deal was to Loglisci. GT Brands ultimately reversed course and offered to manufacture and distribute the DVD at a discount from its standard fee. Rattner approved the proposed terms of the distribution deal.
The SEC’s complaint alleges that in late October 2004, after Rattner and others from Quadrangle had already met with Loglisci and the Retirement Fund’s private equity consultant and received encouraging feedback from both of them, Morris met with Rattner and offered his placement agent services to Quadrangle. Morris warned Rattner that Quadrangle’s negotiations with the Retirement Fund could always fall apart. Although Quadrangle was already working with a placement agent, Quadrangle agreed to pay Morris as well.
According to the SEC’s complaint, soon after Quadrangle retained Morris as a placement agent and Rattner had advised Morris that GT Brands was moving forward with the deal to distribute the Chooch DVD, Loglisci personally informed Rattner that the Retirement Fund would be making a $100 million investment in the Quadrangle fund.
The SEC alleges that Morris later contacted Rattner and pressed him for a financial contribution to Hevesi’s re-election campaign. Although Rattner purportedly had a personal policy that he would not make political contributions to politicians who have influence over public pension funds, Rattner agreed to find someone else to make the contribution. After speaking with Morris, Rattner asked a friend and the friend’s wife to each contribute $25,000 to Hevesi’s campaign. The day after these contributions were communicated to Hevesi’s campaign staff, Hevesi telephoned Rattner and left him a message thanking him for the contribution. In late May 2006, Rattner’s friend transmitted the promised campaign contributions to Rattner, who forwarded the two checks to Hevesi’s campaign. Approximately one month later, Loglisci committed the Retirement Fund to an additional $50 million investment in the Quadrangle fund.
In settling the SEC’s charges without admitting or denying the allegations, Rattner consented to the entry of a judgment that permanently enjoins him from violating Section 17(a)(2) of the Securities Act of 1933 and orders him to pay approximately $3.2 million in disgorgement and a $3 million penalty. The settlement is subject to court approval. Rattner also consented to the entry of a Commission order that will bar him from associating with any investment adviser or broker-dealer with the right to reapply after two years.”

Shake downs by state and local politicians is very common in America. I remember when my parents wanted a building permit to put up a cabin in Northern Michigan the local building inspector had to collect a fee for the permit which presumably went to the county and a bottle of Whiskey which most likely stayed with the inspector. No one cared about the little gratuity since once it was paid you could build anything and it would pass inspection. Today of course the price of paying off public officials is far more than a bottle of even one of the best bourbons distilled in Kentucky.

In the above case the SEC has again proved itself as an advocate for the people when businessmen and politicians work together against the interests of the general public. It is sad that so many people in America believe that giving and receiving bribes is just a part of capitalism. Indeed it is the way capitalism works in poor undeveloped regions of our planet. Real capitalism as practiced in the civilized world has more to do with competition between firms over the price and quality of goods and services; not competion over who will pay the biggest bribe.

NEW SEC RULES TARGET POLITICAL PAYOFFS

Mary Shapirro and the SEC has made perhaps the boldest move yet in trying to impliment reforms to get some of the corruption out of our government. The following is an excerpt from the SEC meeting held on June 30, 2010:

Good Morning. This is an open meeting of the U.S. Securities and Exchange Commission on June 30, 2010.

Today we consider adopting rules that would significantly curtail the corrupting influence of "pay to play." Pay to play is the practice of making campaign contributions and related payments to elected officials in order to influence the awarding of lucrative contracts for the management of public pension plan assets and similar government investment accounts.

Pay to play distorts municipal investment priorities as well as the process by which investment managers are selected. It can mean that public plans and their beneficiaries receive sub-par advisory performance at a premium price.

The cost of this practice is borne by retired teachers, firefighters and other government employees relying on expected pension benefits, or by parents and students counting on a state-sponsored college savings account. And, ultimately, this cost can be borne by taxpayers, who may have to make up shortfalls when vested obligations cannot be met.

An unspoken, but entrenched and well-understood practice, pay to play can also favor large advisers over smaller competitors, reward political connections rather than management skill, and — as a number of recent enforcement cases have shown — pave the way to outright fraud and corruption.

There should be no place for such practices in an investment advisory industry subject to high fiduciary standards. The selection of investment advisers to manage public plans should be based on the best interests of the plans and their beneficiaries, not kickbacks and favors.

The rules we consider today will help level the playing field, allowing advisers of all sizes to compete for government contracts based on investment skill and quality of service.

Background
When the Commission first considered a proposal to curb adviser pay to play practices in 1999, it was, in part, motivated by widespread media accounts of dubious arrangements between fund managers and municipal officials.

In the years since, the amount of money at stake — and the incentive for inappropriate conduct — has ballooned. Public pension plans now represent one-third of all U.S. pension assets, with more than $2.6 trillion in assets under management.

Additionally, state-sponsored higher education savings plans — commonly known as "529s" — now hold approximately $100 billion in assets. These plans were in their infancy when the Commission first took up this issue in 1999.

The SEC has brought a series of enforcement actions charging investment advisers with participating in pay to play schemes. Most recently, we brought a civil action involving allegations of unlawful kickbacks paid in connection with investments by the New York State Common Retirement Fund.

In recent years, civil and criminal authorities also have brought cases in California, New York, New Mexico, Illinois, Ohio, Connecticut, and Florida, charging the same or similar conduct.

Our recent cases may represent just the tip of the iceberg. I fear that many other efforts to influence the selection of advisers to manage government plans pass unnoticed or — though highly suspect — cannot be proven to have crossed the line into actionable behavior.

Not surprisingly, parties to these suspect transactions take care to blur their motives, to hide their actions and to conceal their connections, making it difficult to prove a direct quid-pro-quo or an intent to curry favor in a specific case. The prophylactic rules we consider today are designed to eliminate this legal and ethical gray area.

Elements of the Rule
The rule we consider today has three key elements:

First, it would prohibit an adviser from providing advisory services for compensation — either directly or through a pooled investment vehicle — for two years, if the adviser or certain of its executives or employees make a political contribution to an elected official who is in a position to influence the selection of the adviser.
Second, the rule would prohibit an adviser and certain of its executives and employees from soliciting or coordinating campaign contributions from others — a practice referred to as "bundling" — for an elected official who is in a position to influence the selection of the adviser. It also would prohibit solicitation and coordination of payments to political parties, when the adviser is pursuing business from public entities.
Finally, and very importantly, the rule would prohibit an adviser from paying third-party solicitors who are not "regulated persons" subject to prohibitions against making contributions. Such "regulated persons" would be limited to registered investment advisers and to broker-dealers subject to pay to play restrictions.
Third party placement agents have been involved in some of the most egregious pay to play activities in recent years, and their activities should not continue unabated. The approach we are taking is a strong step toward eliminating the corruptive influence that can result from the use of third party placement agents.

It will greatly improve the status quo by banning payments to third parties who solicit government clients, unless they are "regulated persons" subject to pay to play restrictions comparable to the rule we are considering for adoption today.

This approach provides far greater protection of public pension plans and their beneficiaries than is currently the case, as third party placement agents come under the regulatory umbrella and, for the first time, become subject to meaningful federal pay to play restrictions.

This approach should effectively eliminate the opportunity for abuse that currently exists from third party placement agents. However, if the Commission determines that third party placement agents continue to inappropriately influence the selection of investment advisers for government clients — even under our enhanced rules — I expect that we would consider the imposition of a full ban on the use of these third parties.

Let me end by underscoring once again why we are here today. Pay to play practices are corrupt and corrupting. They run counter to the fiduciary principles by which funds held in trust should be managed. They harm beneficiaries, municipalities and honest advisers. And they breed criminal behavior. I hope my colleagues will join me today in striking a blow against a practice that has no legitimate place in our markets.

Before we hear more details about the rules we are considering for adoption, let me first offer my thanks to the individuals — representing a cross-section of four divisions and numerous offices — for their help in bringing to the table today a truly thoughtful, impressive and potent example of rulewriting."









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