SEC Charges Private Equity Firm in Kickback Scheme Involving New York Pension Fund
FOR IMMEDIATE RELEASE
Washington, D.C. April 15, 2010 - The Securities and Exchange Commission today charged a private investment firm and one of its affiliated entities for participating in a widespread kickback scheme to obtain investments from New York's largest pension fund.
The SEC alleges that Quadrangle Group LLC and Quadrangle GP Investors II, L.P. secured a $100 million investment from the New York State Common Retirement Fund. The investment came only after a then-executive at Quadrangle arranged for an affiliate to distribute the DVD of a low-budget film that former New York State Deputy Comptroller David Loglisci and his brothers had produced.
The SEC further alleges that the Quadrangle executive also agreed to pay more than $1 million in purported "finder" fees to Henry Morris, the top political advisor and chief fundraiser for former New York State Comptroller Alan Hevesi. The SEC previously charged Morris and Loglisci for orchestrating the fraudulent scheme that extracted kickbacks from investment management firms seeking to manage the assets of the Retirement Fund.
Quadrangle agreed to settle the SEC's charges and pay a $5 million penalty.
"Today's action is yet more evidence that kickbacks and corruption contaminated the Retirement Fund," said Robert Khuzami, Director of the SEC's Division of Enforcement. "The victims were New York State's hard-working retirees, who were entitled to have honest advisers manage their hard-earned dollars."
David Rosenfeld, Associate Director of the SEC's New York Regional Office, added, "This pay-to-play scheme resulted in the retirement fund's assets being invested with Quadrangle for the hidden purpose of enriching a political operative and the Deputy Comptroller's brother."
According to the SEC's complaint, filed in federal district court in Manhattan, the Quadrangle executive and Morris knew each other through political work. The Quadrangle executive met with Morris in December 2003 to discuss obtaining investments from the Retirement Fund and other large public pension funds. During this meeting, Morris informed the Quadrangle executive that a brother of Loglisci was involved in producing a low-budget film called "Chooch." Morris specifically asked the Quadrangle executive, who has ties to the entertainment industry, whether he could help Loglisci's brother obtain financing for the theatrical distribution of the film. Within days of that meeting, Loglisci's brother contacted the Quadrangle executive and personally made the same request. Although the Quadrangle executive tried to assist Loglisci's brother, those efforts did not immediately lead to a theatrical distribution deal.
The SEC alleges that approximately one year later, in the fall of 2004, Loglisci's brother again contacted the Quadrangle executive, this time to ask for help in securing a DVD distribution deal for "Chooch." Within days of speaking to Loglisci's brother, the Quadrangle executive directly contacted Loglisci about investing in a new Quadrangle private equity fund that the firm was marketing at the time. The Quadrangle executive expressed his intention to help secure a DVD distribution deal. Shortly thereafter, Loglisci's brother met with an executive at GT Brands - a Quadrangle affiliate - to discuss a possible DVD distribution deal for Chooch. An e-mail sent to the Quadrangle executive by GT Brands' chief executive officer stated that it was inclined to "take a pass" on distributing the Chooch DVD.
According to the SEC's complaint, Loglisci's brother telephoned the Quadrangle executive the following day to complain about the treatment he received from GT Brands. The Quadrangle executive then warned the GT Brands CEO to treat Loglisci's brother "carefully" because Quadrangle was trying to obtain an investment from the Retirement Fund through Loglisci. As a result, GT Brands representatives met with Loglisci's brother for a second time, but again the outcome was disinterest in distributing Chooch.
According to the SEC's complaint, the Quadrangle executive again e-mailed the GT Brands CEO with the instruction to "dance along" with Loglisci's brother while the Quadrangle executive figured out whether Quadrangle "needed" to do a distribution deal in order to secure an investment from the Retirement Fund. According to an e-mail, the Quadrangle executive telephoned Morris to inquire whether "GT needs to distribute [the Chooch] video" and, in response, Morris offered to "nose around" to determine how important the DVD distribution deal was to Loglisci. GT Brands ultimately reversed course and offered to manufacture and distribute the Chooch DVD at a discount from GT Brands' standard fee. The Quadrangle executive approved the proposed terms of the distribution deal.
The SEC alleges that at approximately the same time that the Quadrangle executive arranged for GT Brands to distribute the Chooch DVD, the Quadrangle executive also caused Quadrangle to retain Morris as a "placement agent" even though the Quadrangle Executive was already dealing directly with Loglisci and, as a result, Quadrangle did not need any placement services. Morris met with the Quadrangle executive and solicited a purported "finder" fee from Quadrangle. The Quadrangle executive later e-mailed Morris to advise him that GT Brands was moving forward with the deal to distribute the Chooch DVD, and approximately three weeks later, Loglisci personally informed the Quadrangle executive that the Retirement Fund would be making a $100 million investment in the Quadrangle fund.
As a result of the Retirement Fund's investment in Quadrangle Fund II, the Retirement Fund paid approximately $5 million in management fees pursuant to the limited partnership agreement with Quadrangle GP.
In settling the SEC's charges without admitting or denying the allegations, Quadrangle Group LLC and Quadrangle GP Investors II, L.P. consented to the entry of a judgment that permanently enjoins them from violating Section 17(a)(2) of the Securities Act of 1933 and orders them to pay the financial penalty. The settlement is subject to court approval.
The SEC's investigation is continuing.
The New York State Attorney General's Office announced today that Quadrangle has agreed to make a payment of $5 million to the Retirement Fund and an additional $2 million payment to the New York State Treasury. The Commission acknowledges the assistance and coordinated efforts of the New York State Attorney General's Office.
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For more information about this enforcement action, contact:
Associate Director, SEC's New York Regional Office
George N. Stepaniuk
Assistant Director, SEC's New York Regional Office
Maureen F. Lewis
Assistant Director, SEC's New York Regional Office
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