New York State Attorney General Andrew Cuomo is promoting legislation that would replace the New York State Comptroller, currently the sole trustee of the $116.5 billion
New York State Common Retirement Fund’s target allocation for the alternative asset class is 8 percent. As of March 31, its actual allocation stood at 9.8 percent. The private equity portfolio has assets of roughly $11 billion, about one-third of which is committed to 10 captive funds of funds, making it one of the biggest backers of such programs in the country.
The sole trustee model has come under fire before. A decade ago, a similar scandal hit Connecticut when its former treasurer and sole fiduciary of the state’s pension fund, Paul Silvester, pled guilty in September 1999 to accepting payoffs and campaign contributions in return for committing money from the
In early October, Cuomo, along with a bipartisan group of legislators, proposed legislation that would not only establish a board, but would eliminate campaign contributions from firms investing public pension money and ban the use of intermediaries who are paid to steer pension fund money to particular investment firms. The legislation would also strengthen enforcement by adding misdemeanor and felony provisions.
Specifically, the proposed laws would establish a 13-member board of trustees, with the comptroller as chairperson. All members of the board would be required to have investment expertise, and no one who has been employed by the retirement system for the past three years would be able to serve on the board.
In addition, investment firms would be prohibited from using placement agents, lobbyists or any other third-party intermediaries to interact with public pension funds for any reason. However, consultants and investment banks would be able to assist investment firms with such tasks as preparing marketing materials or performing due diligence. The legislation forbids 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 a board member.
The proposals also require disclosure of information about the identities, responsibilities and qualifications of investment fund personnel and any payments made by investment firms to third-parties in connection with public pension fund matters. And the legislation prohibits improper relationships between pension fund officials and an investment firm’s personnel or agents; “revolving door” employment of former public pension fund officials and employees by investment firms; and improper gifts from investment firms to public pension fund employees and officials.
“For decades, the State pension fund has been weakened and corrupted by the sole trustee model,” said Cuomo in a prepared statement. “The model has allowed pay-to-play to flourish … To put it simply – the model doesn’t work. It’s about as sensible as having a single lock on Fort Knox. Today’s legislation will ensure that the fate of our public retirement fund isn’t decided by one individual, and that the entire system is rid of the kind of pay-to-play that infected and derailed it in the first place,” said Cuomo.
The legislation was spurred by a two-year investigation by the Attorney General’s office into corruption involving the New York State Comptroller’s Office and the pension fund. The investigation uncovered a scheme leading to charges against Hank Morris, an adviser to Hevesi, David Loglisci, the pension fund’s former CIO, former Liberal Party Chair Ray Harding, and investment adviser Saul Meyer. Meyer, Harding, hedge fund manager Barrett Wissman, and Julio Ramirez, an unlicensed placement agent associated with Wetherly Capital, have pled guilty to Martin Act securities fraud charges.
In response to the proposed legislation, current New York State Comptroller Thomas DiNapoli issued a lukewarm statement of support: “The viability of a board should be put on the table…. There are any number of issues that have to be resolved, including the make up of a board, how board members would be selected, what is the fiscal impact and cost of the new system, and perhaps most significantly, the constitutionality of this kind of change…..This bill opens the door on those discussions. The time is right for this debate.”
Latest Developments In NY Pay-To-Play Scandal
• As of July, buyout firms
• The SEC unveiled a proposal on August 7 to eliminate the use of placement agents nationwide and outlined a number of restrictions on political contributions.
• In September, four firms pledged to the “Code of Conduct:”
• Placement agents quickly push back on proposed ban. David M. Love, a managing director with placement agent C.P. Eaton Partners, wrote in a letter posted on the SEC’s Web site: “The broad-based ban on placement agents is unjustified. Because it does not differentiate between [the] legitimate firms in the business and the illegitimate pay-to-play entities, if enacted it would seriously damage a valuable segment of the investment industry. In turn, it would harm the ultimate investors that the SEC is charged with protecting.”
• In early October, Saul Meyer pled guilty to one count of securities fraud in violation of the Martin Act, a Class E felony. In his allocution, he admitted that he had succumbed to pressure from pension fund officials and other politcally connected individuals in New York and New Mexico who sought personal, financial and political gain.