Markstone co-founder pleads guilty in NY pension probe

Elliott Broidy, co-founder of Los Angeles-based PE firm Markstone Capital Group, last week pleaded guilty to a felony charge for bribing four senior officials who managed the New York State Common Retirement Fund.

In announcing the guilty plea, New York Attorney General Andrew Cuomo said in a statement that Broidy paid nearly $1 million in gifts to four officials in the New York State comptroller’s office and was rewarded with a $250 million investment in the firm’s debut fund, an $800 million vehicle that closed in 2005.

“This is an old-fashioned pay-off of state officials. This is effectively bribery of state officials,” the Democratic attorney general told reporters by telephone. Cuomo added that Markstone is still being investigated.

Broidy’s guilty plea may result in a four-year prison sentence.

Broidy, who resigned as chairman from Markstone last week, issued a statement through an attorney that read: “Broidy regrets the actions that brought about this course of events, but is pleased to have resolved this matter with the NYAG and will be cooperating in the ongoing investigation.”

Following Broidy’s resignation, Dan Gillerman, formerly Israel’s ambassador to the United Nations, has been named chairman of Markstone.

Markstone says that it has thus far invested $562 million in 10 companies from its fund, with an overall gross IRR of 11 percent. Current investments include Israeli jewelry retailer Magnolia Silver Jewelry, and Rochester Hills, Mi.-based off-road vehicle maker TOMCAR Ltd., according to Thomson Reuters (publisher of PE Week).

The fund has already distributed $218 million to its investors, the firm said. In addition to New York Common, limited partners in Markstone include Israeli insurance company Clal Insurance Pensions and Finance Group and Oregon Investment Council.

New York’s pension fund has reaped $64 million from its investment in Markstone and has a $156 million stake, said a spokesman for Comptroller Thomas DiNapoli. Broidy’s exit from the firm triggers a key man provision, and the pension fund can back out its remaining commitment if it wishes; the comptroller’s office is reviewing its options.

Broidy’s plea is the fifth in the kickback probe, which has focused on the placement agents that have helped investment firms receive commitments from the $126 billion state pension fund.

Others to plead guilty include Saul Meyer, founding partner of Dallas-based private equity advisor Aldus Equity, and Ray Harding, former head of the New York Liberal Party. Alleged masterminds David Loglisci, former CIO of New York State Common, and Hank Morris, a former placement agent, have both pled not guilty and remain under indictment.

Cuomo‘s probe has also included consultant Pacific Corporate Group and investment firms Riverstone Holdings and The Carlyle Group, which collectively have paid millions of dollars to settle their roles and have adopted the attorney general’s reform code. The code of conduct bans investment firms from hiring, using or compensating placement agents, lobbyists, or other third-party intermediaries in relation to their efforts to obtain pledges from public pension funds.

Cuomo said he has recovered $100 million so far, including $18 million forfeited by Broidy. —Joan Gralla and Jim Christie, Reuters, with additional reporting from PE Week