Friday, March 5, 2010

Is AG Cuomo investigating NYCERS?

On February 8, 2010, Attorney General announced agreements with Markstone Capital Group and Wetherly Capital Group and its broker/dealer DAV/Wetherly Financial to resolve their roles in Cuomo’s investigation into pay-to-play practices involving the NYS Common Retirement Fund (CRF). Markstone agreed to return $18M to CRF and Wetherly agreed to return $1M to CRF. Wetherly also agreed to exit the placement agent business.

Wetherly represented three private equity firms before CRF. They were Ares, Freeman Spogli, and Levine Leichtman. Wetherly was paid fees by these firms and then split the fees with Henry “Hank” Morris. NYCERS also has contracts with these three firms as well as Markstone.

In 2005, NYCERS entered into a contract with Paladin Homeland Security, another private equity firm and as of September 30, 2005 has invested $17.83M with Paladin under two different contracts. Actually, the Comptroller negotiated and signed the contract for NYCERS. The trustees are unaware of the terms and conditions of the contract. This is true of all investment contracts that the Comptroller arranges for NYCERS. Other NYC pension funds also have invested funds with Paladin.

From inception till June 30, 2009 NYCERS has paid Paladin $3.5M in fees for both partnerships. NYCERS has scheduled $837,000 for FY-2010 in fees for Paladin.

In fact, the Comptroller directly paid these fees to Paladin. NYCERS has surrendered control of payment of investment fees to the Comptroller. This means NYCERS never knows what is actually being paid by the Comptroller. The fund also does not know when the fees are paid or how they are paid.

This is in clear violation of Section 13-137 of the NYC Administrative Code.

§ 13-137 Payments from funds. All payments from such funds shall be made by such comptroller upon a voucher signed by the executive director of the retirement system.

In 1996, I had a fight with Comptroller Hevesi’s office over his attempt to short circuit this statutory requirement. For some reason the NYC Law Department folded and stated that NYCERS could violate this state law. For the record, this statute mimics the standard accounting practice of two person control, a bedrock of fraud control in any organization.

Here is the punch line. Between 2005 and 2007, Paladin paid $931,236 to DAV/Wetherly. Paladin paid this amount in return for “services” rendered in association with investments made by the NYC pension funds with Paladin. This information was included in a report prepared by Paladin and submitted to CALPERS as part of CALPERS effort at full disclosure of third party activity surrounding CALPERS investments.

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