peHUB Wire: Friday, September 18, 2009

On Monday, Manhattan federal judge Jed Rakoff rejected a proposed $33 million settlement between the SEC and Bank of America, over the issue of whether BoA had lied to shareholders about bonuses paid to Merrill Lynch employees. Near the end of his ruling, Rakoff wrote:

Oscar Wilde once famously said that a cynic is someone “who knows the price of everything and the value of nothing.” Oscar Wilde, Lady Windermere’s Fan (1892). The proposed Consent Judgment in this case suggests a rather cynical relationship between the parties: the S.E.C. gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the Bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth.

This characterization also could be applied to the New York pay-to-play investigation, with the state attorney general’s office subbing for the SEC.

For the uninitiated, former New York pension fund official David Loglisci and “placement agent” Hank Morris were indicted earlier this year for allegedly conspiring to take money from private equity firms in exchange for fund commitments from NYCRF (i.e., kickbacks). There since have been a small handful of other indictments, including of two other alleged fixers and a politically-connected fund-of-funds manager.

What there have not been, however, are indictments against the private equity firms that paid Morris to help secure commitments from the New York Common Retirement Fund. Instead, there have been a steady series of “agreements” whereby the firms “repay” a certain amount of money and sign codes of conduct (which basically say the firms won’t use placement agents to solicit fund capital from public pensions).

In exchange, the firms are excused from any future prosecution under New York’s vague and expansive Martin Act. None of the agreements include an admission of wrongdoing, nor does AG Andrew Cuomo allege that the firms did anything illegal.

This “repent for nothing” strategy was in full effect yesterday, when Cuomo announced agreements with four more firms: Access Capital Partners, Falconhead Capital, HM Capital Partners and Levine Leichtman Capital Partners. The firms “repaid” a total of $4.66 million, signed codes of conducts and got to put this mess behind them. Two of the firms had direct relationships with Morris (HM and Falconhead), while Access and Levine Leichtman hired other fixers who basically sub-contracted Morris (without the firms’ knowledge, according to Cuom! o).

To be clear, I believe that many of the firms signing agre ements with Cuomo knew what was happening. Not the specific mechanics (i.e., the kickback scheme), but that someone like Morris did more than simply present a compelling case to pension fund staffers. So, yes, a lot of them are crooked.

But Cuomo is also exhibiting bad behavior. He pulls these firms into a room, and effectively says: “If we choose to prosecute, we’d have a very strong case. But we might be willing to reach an agreement that could be in both of our best interests. You wouldn’t be prosecuted, and we wouldn’t spend the time and money prosecuting you.”

It’s all hypothetical, but the message is clear: Settle or else.

Private equity firms simply cannot afford to be charged with this sort of crime. Not only would the legal fees likely become larger than the “repayments,” but it would be virtually impossible to secure new fund commitments while under indictment. Even if a firm were to ultimately! prevail in court, it would still have a lingering stain on its reputation.

So the firms settle, choosing the path of least resistance. Both the guilty and the innocent. We, of course, can’t distinguish between the two, because Cuomo has intentionally shielded us from the truth.

To put it in language Cuomo might understand: I’m not saying you’re an extortionist. I’m just saying, what if I said you were?


*** Plug #1: More than 100 tickets have already been sold for our Dallas Shindig, which takes place on October 14. Sponsors are Landmark Partners, New Capital Partners and StaffOne. Ticket proceeds go to a charity that will be selected by event attendees…

*** Plug #2: Agenda and registration info for our Boston cleantech evening, taking place on October 27 at Bingham McCutchen. Topic is making sense of Washington’s cleantech funding and regulatory environment.

Top Three

TA Associates has agreed to acquire Vatterott Educational Centers Inc. from Wellspring Capital Management. No financial terms were disclosed. Vatterott is a St. Louis-based provider of career-oriented post-secondary education, with 22 U.S. campuses.

Calypso Medical Technologies Inc., a Seattle-based developer of real-time localization technology used for the tracking of tumor targets, has raised $50 million in fifth-round funding. Skyline Ventures and Frazier Healthcare Ventures co-led the deal, and were joined by fellow return backers Bay City Capital and InterWest Partners. The company has now raised nearly $175 million in total VC fun! ding since 1999.

Bruce Chizen, former CEO of Adobe Systems, has joined Voyager Capital as a venture partner. He previously had served on Voyager’s advisory board, and will focus on the digital media and software sectors.

VC Deals

NextBio, a Cupertino, Calif.-based developer of an online search engine for life sciences data, has raised $8 million in Series C funding led by return backer Newbury Ventures.

BonitaSoft, a Grenoble, France-based developer of open-source business process management software, has raised $3 million in Series A funding. Backers include Ventech and Auriga Partners, while Chausson Finance served as placement agent.

Buyouts Deals

Cortec Group has acquired a majority stake in 180 Medical Inc., an Oklahoma City-based distributor of disposable, single-use urologic catheters in home settings. No financial terms were disclosed, except that Madison Capital Funding led the senior note facility.

Flextronics has completed the sale of its stake in communications equipment maker Aricent to KKR and CPP Investment Board, for $255 million. Together with its initial investment in 2006, KKR now holds a 79% stake in Aricent.

Rutland Partners has acquired the CeDo group of companies from Delton AG for £52.2 million. CeDo is a Europeanmaker ofhousehold disposables, including garbage bags and aluminum foil. It mostly focuses on the UK, French and German markets, but also has a presence in Eastern Europe.

Symphony Technology Group has matched an $8.15 per share offer for MSC Software Corp. (Nasdaq: MSCS), which had come from an undisclosed private equity firm.

PE-Backed IPOs

Amadeus, a global travel reservations company controlled by BC Partners and Cinven, has hired Rothschild to study a possible IPO. Other shareholders include Air France, Iberia and Lufthansa.

BC Partners reportedly is preparing to pick underwriters for a flotation of Medica, a French homecare company that BC acquitted in 2006 for €750 million.

PE Exits

IHS Inc. (NYSE: IHS) has acquired Environmental Support Solutions Inc., a Tempe, Ariz.-based provoider of environmental, crisis management and health and safety software for the enterprise. The deal is valued at approximately $59 million, net of cash acquired.ESS had raised over $8 million in VC funding, from firms like Grayhawk Venture Partners, Harvard Investments and CSL Equity Investments.

RuggedCom Inc. (TSX: RCM) has acquired WiNetworks, an Israel-based provider of WiMax and digital video broadcasting technologies. The deal is valued at approximately $9 million in cash. WiNetworks had raised around $20 million in VC funding, from firms like Cedar Fund, Columbia Capital, Evergreen Venture Partnersand Rho Ventures.

PE-Backed M&A

CST Industries Inc., a Kansas City-based maker of factory-coated metal storage tanks and silos, has acquired Temcor Inc. from Solis Capital Partners. No financial terms were disclosed. Temcor is a Gardena, Calif.-based maker of specialized aluminum dome structures. CST is a portfolio company of Sterling Partners.

Nycomed, a Swiss drugmaker, reportedly has made a fully-financed offer to buy Solvay SA’s drug unit for between €4 billion and €4.5 billion. Nycomed is owned by Blackstone Group, CS Private Equity and Nordic Capital.

Human Resources

Mark Andreessen, a partner with VC firm Andreessen Horowitz, has joined the board of Hewlett-Packard Co.

Frank Castelluccio has joined Broadpoint Gleacher Securities Group as an executive managing director and head of operations. He previously spent eight years as a managing director in the fixed income unit of Jefferies & Company.

Ruth Horowitz has joined IFC Asset Management Co. as chief administrative officer. She previously was a managing director and chief administrative officer of Lehman Brothers’ private equity business.

Michael Rubel has joined RFE Investment Partners as a principal. He had spent the past six years as a principal with Weston Presidio.