SOURCE: Institutional Investor

Institutional Investor

October 06, 2009 01:00 ET

The October Issue of Institutional Investor Magazine Shines a Light on Corruption in the Public Fund Industry, Calls Lawmakers to Action to Eliminate Pay-to-Play

NEW YORK, NY--(Marketwire - October 6, 2009) - In Institutional Investor magazine's 8,000-word October cover story, "Shadow Lands," Staff Writer Imogen Rose-Smith and Contributing Writer Ed Leefeldt reveal the dark underbelly of the $2.2 trillion U.S. public pension industry. It is a world of shadowy backroom deals where the heady blend of political patronage and extreme wealth can -- and all too often does -- lead to a corrupt system where everyone must pay to play. This sinister game enriches those who play -- the hedge fund and private equity managers, consultants, placement agents, pension officials and politicians -- at the cost of taxpayers and pension beneficiaries.

Read the full story online now at www.iimagazine.com

"We don't want our money to become a slush fund for politicians," says Paul Weber, president of the Los Angeles Police Protective League and one of the tens of millions of public servants and pension beneficiaries among the victims if the current system is not exposed and corrected.

The pay-to-play troubles came to light earlier this year among allegations of corruption at the $116.5 billion New York State Common Retirement Fund under former New York comptroller Alan Hevesi by New York State Attorney General Andrew Cuomo. Much of the focus of Cuomo's pay-to-play investigation has been on Henry (Hank) Morris, who acted as a placement agent for managers seeking allocations from the New York Common fund in return for what Cuomo alleges are illegal kickbacks.

"Restoring a sense of responsibility and integrity is an ongoing priority for me and my office," says current New York State Comptroller Thomas DiNapoli. "For public pension plans across the country, this is a key need."

DiNapoli is just one of scores of people interviewed by Leefeldt and Rose-Smith during the six-month-long investigation by Institutional Investor, which found that the troubles in New York are, in fact, part of a much broader problem at public funds across the U.S.

Read the full story online now at www.iimagazine.com

Among the findings discovered by Institutional Investors:

--  While former New York State comptroller Hevesi sought investments from
    other public funds for a private equity fund run by his friend and
    political supporter Elliott Broidy, the New York Common fund made a $250
    million commitment to Broidy's fund.
--  Through his wife, Broidy made thousands of dollars in political
    contributions to officials with oversight for public funds, including
    Hevesi and current New York City comptroller.
--  In a civil suit filed in New Mexico, the former CIO of the state's
    $8.5 billion Educational Retirement Board accuses allies of Governor Bill
    Richardson of making investment decisions for political reasons designed to
    benefit the governor.
--  Under growing public scrutiny, four of Los Angeles mayor Antonio
    Villaraigosa's appointees to the board of the $12.5 billion Los Angeles
    Fire and Police Pensions fund, including Broidy and former California
    Public Employees' Retirement System president Sean Harrigan, have resigned.
--  The efforts of former Ohio Attorney General Marc Dann helped land the
    long time CFO of the $19 billion Ohio Bureau of Workers' Compensation in
    jail for taking gifts and bribes from placement agents and money managers,
    including use of a luxury Florida condominium and payments toward his son's
    college tuition. But Dunn's own ethical transgressions forced him out of
    office before he could achieve greater reform.
--  Connecticut State Treasurer Denise Nappier is among those who worry
    that the fallout from Cuomo's investigation will disproportionately hurt
    small, often women- and minority-owned firms.
--  Carlyle Group paid $20 million to settle charges with Cuomo, who
    alleged that the private equity firm had acted inappropriately in winning
    business from New York Common fund, less than the $30.5 million in fees
    that Carlyle had collected from New York Common between fiscal year 2004 to
    2008.
    

Cuomo and the Securities and Exchange Commission have proposed reforms to address the problems. The New York attorney general is encouraging managers to voluntarily sign his "Public Pension Fund Code of Conduct," which commits them to not using placement agents when seeking business from public funds and bars them from making campaign donations to officials who have influence over public fund investment decisions. The SEC commissioners could vote their similar set of measures into law as early as this month, following a 60-day public comment period that expires today, October 6.

But as "Shadow Lands" shows, the current efforts at reform fall short and run the danger of making the situation worse. Institutional Investor believes that a ban on placement agents won't fix the problem. In fact, it will very likely make the business of running public pension money even more difficult while further benefiting some of the very same managers that thrived under the corrupt system that spawned pay-to-play.

Read the full story online now at www.iimagazine.com

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