Money Dispute Heats Up At PCG

Carried interest payments can make for a nice annuity for executives long after they leave a private equity shop. They can also be a source of nasty disputes.

Such is the case at Pacific Corporate Group, a La Jolla, Calif.-based private equity advisory firm, where a former executive has filed a lawsuit claiming he hasn’t been paid all of the investment gains owed him. The firm has counter-sued, arguing it should not have to pay someone whom it believes engaged in an “illegal kick-back scheme,” according to PCG’s cross-complaint.

A trial date of July 1, 2011, in a San Diego, Calif., Superior Court of the State of California has been set for the dispute between PCG and the former executive, Stephen Moseley, in a case that’s also part of the fallout of the recent pay-to-play scandal at the New York State Common Retirement Fund.

Led by CEO Christopher Bower, PCG advises institutional clients such as the California Public Employees’ Retirement System on their private equity investments. Over the years, the firm has experienced a number of disputes over compensation (see sidebar).

Moseley joined PCG in 2001 and served as managing director and co-president of PCG Capital Partners, which managed a $500 million direct investment fund and a $150 million co-investment fund. He also served as the head of research and was a member of the executive committee.

The details of Moseley’s compensation package aren’t clear, but it wouldn’t be unusual for someone in his position to be entitled to a share of the profits from investments he oversaw. And because of the illiquid nature of the investments, Moseley might not receive distributions until years later.

In fact, PCG made occasional payments to Moseley after he left the firm in 2006, according to a Dec. 2009 letter PCG sent to Moseley. The letter also states PCG would make no further distributions because “you engaged in wrongful activities which caused PCG to incur millions of dollars in damages,” a reference to the New York State pay-to-play scandal.

Moseley filed a suit against PCG this February alleging breach of contract, among other complaints, for failure to pay him all of the compensation he believed was owed to him. The suit suggests that PCG accused Moseley of wrongdoing only to deflect blame from the firm’s own role in the New York State scandal.

PCG filed an amended cross-complaint in May. It states that Moseley’s allegations about the firm “must be evaluated in the context of the racketeering, illegal kickbacks, betrayal and deceit” carried out by Moseley and his “co-conspirators.”

One of the alleged co-conspirators is Hank Morris, previously an adviser to ex-New York state comptroller Alan Hevesi, and David Loglisci, the pension fund’s former CIO. Morris has been accused of coercing firms to pay millions in finder’s fees to companies he controlled in return for pledges from the New York State pension to certain private equity funds. Morris is slated to stand trial next spring to face 77 criminal charges. Loglisci and several others have already pleaded guilty for their roles in the operation.

The PCG cross-complaint claims that Moseley chose “to conspire secretly” with Morris “to give Morris a hidden 5 percent interest” in a joint venture being formed by PCG to make private equity investments on behalf of the New York pension. A spokesman for PCG said, “We understand [Moseley] cooperated, and he still might be charged.”

PCG was a minority partner in the joint venture, Strategic Co-Investment Partners, along with hedge fund manager Clinton Group and Barrett Wissman, a hedge fund manager and friend of Loglisci, according to a press release from the attorney general’s office. “Wissman and Loglisci allegedly hid Morris’s secret ownership interest from senior management” at PCG and the pension fund, the press release said. PCG ended up returning $2.1 million in fees to the New York pension fund as part of a settlement with the New York attorney general.

Moseley’s attorney, Thomas Stoddard, said his client had “no involvement in the kickback scheme at all.” Stoddard also said that Moseley has “been assured by the attorney general of New York that he is not a target of any investigation.” Moseley is seeking an amount “in the low seven figures,” Stoddard said, for “investment gains identified but not paid.”

After leaving PCG in 2006, Moseley became a managing director at Estes Management LLC, the private equity unit of the Clinton Group, and later became president of the Stepstone Group, a private equity advisory shop. Moseley resigned from that post in May 2009. In his letter of resignation, he pointed to press reports that linked him to the scandal and the unfair distraction it was causing for StepStone. Moseley is now managing Rockland Management, a private equity and real estate investment business in Princeton, N.J.

PCG claims in its cross-complaint that “not only has it paid Moseley all sums to which it believed he was due” but has overpaid him. It said that Moseley’s actions have cost the firm damages, lost profits and attorney’s fees, all of which PCG seeks to recover. It’s seeking economic damages, punitive damages and the return of all profits Moseley earned from “unlawful or unfair practices,” among other demands, although a specific dollar amount is not noted in the demand for damages.

Sidebar: Compensation Disputes at PCG

Sidebar: PCG in its cross-complaint notes that it also recently has withheld distributions from Monte Brem and Tara Blackburn, both former employees of PCG, claiming that because the firm didn’t know about the liabilities to the firm created by the illegal kickback scheme, it didn’t account for those liabilities when it made payments to Brem and Blackburn, and thus they were overpaid. The document also mentions that the firm has claims against other former employees, namely Walter Fitzsimmons and Scott Vollmer. “Only Brem and Blackburn, who are tied with Moseley,” have compensation issues with PCG, said the firm’s spokesman.

Timothy Kelleher and Douglas Meltzer, both currently managing directors with PCG Capital Partners, also have compensation problems with PCG, claiming, in a petition filed in a San Diego Superior Court on Aug. 31, that they believe compensation is due to them for their work running PCG Corporate Partners Advisors II, an entity formed to run several direct investment funds, including a $500 million fund that has the California Public Employees’ Retirement System as its main client. The profits and distributions from the entity are allocated with 40 percent going to PCG and 30 percent each to Kelleher and Meltzer. The request for arbitration claims that more than $2 million is being “improperly and illegally” withheld from the two. PCG’s spokesperson said there is no pay dispute with Kelleher and Meltzer.