Report: Auto Czar's Investment Firm Focus of Pay-to-Play Probe

April 17, 2009 ( - According to media reports, the man named to head the Obama administration's auto task force is a figure in an ongoing state-federal probe of potential pay-to-play wrongdoing focused on New York state's pension program.

A Washington Post article, citing an unnamed source, said Steven Rattner’s investment firm Quadrangle Group is one of about a dozen private-equity companies and hedge funds involved in the  investigation by the U.S. Securities and Exchange Commission (SEC) and New York Attorney General Andrew Cuomo.   Quadrangle invests in the media and telecom sectors.

The story said investigators are examining millions of dollars made by the hedge funds and private equity firm – known as “placement fees” – to middlemen firms. The middlemen companies, in turn, gave the hedge funds and private equity firm a tie-in to the pension program.

While the “placement fees” are common and not illegal, the Post said, the news report indicated the investigators are focusing on whether Quadrangle and other investment managers were knowingly involved in a scheme under which they would pay for being chosen as one of the $122-billion fund’s outside money managers.        


Investigators are also looking at whether Quadrangle and the other firms properly disclosed using the middlemen in their attempts to win pension business.

The SEC Charges

In an amended complaint filed by the Securities and Exchange Commission (SEC) in federal district court in Manhattan, the SEC alleges that Raymond Harding, who is a former leader of the New York Liberal Party, and Barrett Wissman, a former hedge fund manager, participated in a scheme that extracted kickbacks from investment management firms seeking to manage the assets of the New York State Common Retirement Fund. The SEC previously charged Henry “Hank” Morris and David Loglisci for orchestrating the fraudulent scheme to enrich Morris and others with close ties to them. Specifically, the SEC alleges that Wissman arranged some of the payments made to Morris, and Wissman was rewarded with at least $12 million in sham “finder” or “placement agent” fees. Harding received approximately $800,000 in sham fees that were arranged by Morris and Loglisci, according to the SEC.

“These men put their greed above the interests of New York’s hard-working public employees,” said Robert Khuzami, Director of the SEC’s Division of Enforcement in a statement. “We will continue to unravel this tangled web of fraud and corruption.”

James Clarkson, Acting Director of the SEC’s New York Regional Office, added, “Public pension fund investments are supposed to benefit only the fund’s investors. They are not a vehicle for repaying political favors or enriching friends.”

The SEC’s amended complaint alleges that the payments to Morris, Wissman, Harding and certain others were kickbacks that resulted from quid pro quo arrangements or that were otherwise fraudulently induced by the defendants. Loglisci ensured that investment managers that made the requisite payments – to Morris, Wissman, Harding, and certain other recipients designated by Morris and Loglisci – were rewarded with lucrative investment management contracts, while investment managers who declined to make such payments were denied fund business. Morris, Wissman, Harding and the others who received the payments at issue did not perform bona fide placement or finder services for the investment management firms that made the payments.

In a  SEC complaint filed this week, a senior executive of Quadrangle is described as having met with David Loglisci, former chief investment officer for the pension fund, in late 2004 to solicit pension fund investment business. Citing its unnamed source, the Post indentified the person as Rattner, who, as head of the auto task force, is now working to restructure General Motors and Chrysler.

The Post said the first meeting was followed by a second session in which Hank Morris, an adviser to former Comptroller Alan Hevesi, solicited a "finder fee arrangement" with Quadrangle, according to the complaint. Quadrangle signed a contract to pay a placement agency affiliated with Morris 1.1% of any amount invested by the pension fund.

The same senior executive is also described in the SEC complaint as having met with the brother of Loglisci, regarding a DVD distribution agreement of a low-budget film the brother produced called "Chooch." Soon after, a company owned by Quadrangle, GT Brands Holdings, agreed to the $88,841 distribution deal, according to the Post.  

Quadrangle received the investment in September 2005.

A spokesman for Quadrangle said the firm is fully cooperating with the investigation. It has "produced all documents requested and our expectation is that no action will be taken," the spokesman said, according to the Post.

So far, three people have been charged and one, a hedge fund executive, has pleaded guilty. Those facing charges include Morris and Loglisci, who were indicted last month on 123 criminal counts, including corruption, bribery and money laundering.