When former New York State Comptroller Alan Hevesi pleaded guilty to his part in a pay-to-play scandal, he became the highest ranking scalp taken by state attorney general Andrew Cuomo's investigation into the use of placement agents. Chris Panteli looks at the results of Cuomo's three-year quest so far.
Last month, former New York State Comptroller Alan Hevesi pleaded guilty to participating in a pay-to-play scandal while overseeing the $124.8bn New York State Common Retirement Fund.
As part of his guilty plea, Hevesi admitted he accepted nearly $1m in gifts - including $75,000 in travel expenses - from his friend Elliott Broidy, a principal of Markstone Capital Partners, as a reward for giving preferential treatment to their investment proposal.
Hevesi was accused of improperly favouring and ultimately approving $250m in pension fund investments to Markstone, resulting in the fund paying $18m in management fees to the company. He admitted to a second-degree charge of receiving reward for official misconduct and could face up to four years in prison for his crime.
Hevesi was the highest ranking scalp taken in a three-year investigation by state Attorney General, now Governor-elect, Andrew Cuomo, which to date has resulted in seven guilty pleas and has garnered $138m in recoveries for the state.
This has been through agreements with fifteen firms and two individuals, including investment firms, placement agents, political consulting and lobbying firms who have signed up to the Pension Fund Reform Code of Conduct. Launched by Cuomo last year, the Code bans investment firms from compensating intermediaries.
"Alan Hevesi presided over a culture of corruption and violated his oath as a public servant," said Cuomo after the guilty plea. "He was solely charged with protecting our pension fund, but he exploited it for his personal benefit instead. With his guilty plea, we can now focus on the process of restoring public trust in government."
Hevesi's guilty plea was followed this month by a plea deal by his chief political consultant Henry "Hank" Morris. He made the deal with prosecutors amid claims that Quadrangle Group co-founder Steven Rattner, himself the subject of state and federal investigations of corruption at the fund, arranged to retain Morris as a placement agent and paid him more than $1m in sham "finder" fees, according to the SEC and Cuomo.
Cuomo's ongoing investigation and the fall of big names such as Hevesi have bought the activities of placement agents - individuals or companies who approach institutions in an attempt to sell investments on behalf of hedge funds, venture capital and private equity fund managers - into the media spotlight.
Their use has become highly controversial in the US and is now ranked alongside pay-to-play - the practice of making campaign contributions and related payments to elected officials in order to influence the awarding of lucrative contracts for the management of public pension plan assets - as among the biggest governance issue facing pension funds.
New York has been at the forefront of the scourge on these practices, but the state is by no means alone. Last month, California introduced new state legislation which means placement agents who solicit business from its pension funds must now register as lobbyists.
As such, placement agents who do business with the California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (Calstrs) - the two largest pension funds in the US - will be subject to lobbyist reporting and ethics rules under the California Political Reform Act, including bans on campaign contributions and contingent fee arrangements.
"This new law will safeguard the integrity of investment decisions made by our public pension systems, and ensure that the interests of people on Main Street are shielded from the worst kind of influence peddlers on Wall Street," CalPERS Board president Rob Feckner said.
"This bill says public pensions are not for sale. It embodies a principle that has been forgotten and flouted in California and across the nation: Workers, retirees and taxpayers come before politically-connected middlemen and wealthy Wall Street interests."
At the Kansas Retirement System (KRS), investment committee and board member Chris Tobe recently blew the whistle on the fund when he learned it had paid placement agents $15m in fees since 2004 after years of denying it used them. In response to his complaints, the SEC opened an informal inquiry into the Kansas system in September.
"I believe the SEC shares my concerns that 12 separate deals of over $600,000 were struck, five over $1m," Tobe said. "That may imply more than simple commissions. What is uncertain is whether anything illegal occurred or if it is, simply, in my opinion unethical."
And last month it was revealed the Kentucky State auditor has begun a review of state pension agencies, including the use of placement agents, after receiving unspecified complaints.
Auditor Crit Luallen's office will examine the Kentucky Retirement Systems, including its board of trustees, employees, purchases, business practices and ethics policies. Auditors will also determine whether the system's audits and financial reports are adequate.
In a letter sent to Retirement Systems officials, Luallen said the audit was prompted by complaints to her office about "certain activities and financial transactions", reported the Lexington Herald-Leader.
The intensifying spotlight on placement agents and pay-to-play activities ultimately led the SEC to approve new rules to significantly curtail the corrupting influence of "pay to play" practices by investment advisers keen to access the $2.2trn of assets in public pension plans. It had originally planned to ban placement agents and pay-to-play activities but ultimately opted for better regulation.
As part of the curbs, however, advisers are prohibited from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser, unless that third party is an SEC-registered investment adviser or broker-dealer.
"The selection of investment advisers to manage public plans should be based on the best interests of the plans and their beneficiaries, not kickbacks and favours," said SEC Chairman Mary L. Schapiro.
"These new rules will help level the playing field, allowing advisers of all sizes to compete for government contracts based on investment skill and quality of service."
However, some state funds, such as those in Florida and Massachusetts, have defended the use of placement agents. Just because you have bank fraud doesn't mean all banks are crooked, and it's the same with placement agents, they argue.
Mark Evans has been appointed as a director at Independent Trustee Services (ITS) to lead trustee appointments in London.
The Pension Protection Fund (PPF) is consulting on changes to the actuarial assumptions it uses in valuations in a bid to better reflect the bulk annuity market, with schemes set to move into surplus on aggregate.
Private sector defined benefit (DB) schemes were 96.3% funded on a Pension Protection Fund (PPF) compensation basis at the end of July, according to the lifeboat fund's monthly index.
Conduent has completed the sale of its actuarial and human resource consulting business to private equity investor, H.I.G. Capital.