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.
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