Markstone reportedly reaches settlement in kickback investigation

Markstone Capital Partners has reportedly reached a settlement with New York Attorney General Andrew Cuomo over the private equity firm’s alleged role in the state’s pay-for-play scandal.

Cuomo’s office did not return a call for comment before PE Week’s deadline last Thursday.

But a report in Israeli newspaper H’Aaretz says that Markstone has agreed to pay a fine, although no dollar amount was specified. Also not mentioned is anything about Markstone signing Cuomo’s “code of conduct,” but such a scenario seems likely.

Elliott Broidy, co-founder of Los Angeles-based Markstone, last year 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, 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 milestone’s debut fund, an $800 million vehicle that closed in 2005.

Following his guilty plea, Broidy resigned from the firm, which invests in the United States and Israel.

Dan Gillerman, formerly Israel’s ambassador to the United Nations, was then named chairman of Markstone. The firm 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, Mich.-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 the 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.

Markstone’s limited partners are reportedly still mulling over whether to cancel the firm’s remaining investment period, based on Broidy’s plea. As is typical of most firms, Markstone’s PPM includes the following passage about early termination: “In the event that a Principal, the General Partner or the Fund Manager engages in any act or omission involving the Partnership that results in a final, non-appealable criminal conviction of such person or a final, non-appealable judicial determination that such act or omission constitutes fraud, willful misconduct or gross negligence, two-thirds in interest of all of the Limited Partners may vote in writing to terminate the Fund and liquidate the Fund’s investments.”

To date, Cuomo’s investigation into the alleged kickback scandal has resulted in five pleas.

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, formerly head of the New York state pension fund, and Hank Morris, a former placement agent, have both pled not guilty and remain under indictment. —Dan PrimackReuters contributed to this report