Saul Meyer, co-founder of Dallas, Texas–based private equity consultant and fund of funds Aldus Equity, and New York state politician Raymond Harding, pleaded guilty this week to securities fraud in connection to their business dealings with the $116.5 billion New York State Common Retirement Fund.
The pleas are a coup for New York State Attorney General Andrew Cuomo and his ongoing investigation into pension corruption, and bad news for David Loglisci, former CIO of the New York Common Retirement Fund, and Hank Morris, a placement agent and powerful political operative, who were served with a 123-count indictment by Cuomo accusing them of fraud, bribery and money laundering. “These guilty pleas vividly depict the depth and breadth of corruption involving the New York State pension fund,” said Cuomo, who has pledged to fix the pension system.
The issue of corruption at public funds is a sensitive subject — not only for the millions of public workers whose retirement benefits are at stake, but also for people who earn their living in the public pension fund industry. In Institutional Investor’s October cover story, “Shadow Lands,” Ed Leefeldt and I spent six months looking into the problems of corruption at public funds across the U.S. It is clear from our reporting that the apparent issues in New York represent just one — an extreme one, to be sure — example of a national problem. We argue that the reforms being proposed by Cuomo and the U.S. Securities and Exchange Commission, whose comment period for proposed rules designed to reform the process of manager selection in the $2.2-trillion pension system ended this week, fail to address the problem.
Feedback on the story from II’s readers illustrates the sensitivity of the issues at stake here, and the role of placement agents is among the most controversial. Cuomo has been particularly strident in his criticism of these middlemen who serve as an intermediary between public fund officials and money managers looking for business. As we say in our story, placement agents can and do provide an important service to public funds.
At least one II reader, however, objects to our characterization and points out that legitimate placement agents already register, as broker dealers, with the SEC and the Financial Industry Regulatory Authority. “Many are appalled (myself included) at the alleged details of the current case on the front pages with N.Y. State and certain managers, but common sense should have prevented much of the abuse,” he comments on iimagazine.com.
These concerns are understandable. If the SEC’s proposals go through as they currently exist, these independent marketers that work with public funds will effectively be put out of business. The vast majority of them are professionals who have done nothing wrong. But some placement agents were apparently willing to cross the line. Two placement agents Barrett Wissman and Julio Ramirez Jr. have both pleaded guilty to charges of securities fraud bought against them by Cuomo in relation to their dealings with the New York Common Retirement Fund.
The question raised by Meyer and Harding’s pleas, as well the comments on II’s story, is this: When corruption happens at public funds, who is responsible?
It is possible to feel a degree of sympathy for a small, hungry, emerging firm like Aldus Equity was back in 2004 when it entered into an agreement with New York Common. But Aldus co-founder Meyer did not have to take the deal. Another money manager presented with a proposal for the same mandate, which to his mind looked like pay to play, turned the deal down according to sources. Nor did Wissman or Ramirez have to go into business with Morris or Loglisci if they thought that what they were doing was wrong. Morris and Loglicsi have pleaded not guilty to charges against them. It is Ramirez, according to the SEC complaint, who acted as a go-between for Morris in striking the allegedly fraudulent deal with Meyer.
Former New York State comptroller Alan Hevesi, who was the sole fiduciary for the state’s public fund when the alleged misdeeds took place, has not been charged with any crime in relation to the pension fund scandal. It is an open question as to how much, if anything, Hevesi knew about what was allegedly going on at the state fund under his watch.
The problem appears to be that too many people did not pay attention, looked the other way or, worse yet, had a vested interest in allowing the status quo to continue. Why, for example, did the people who are now saying they knew something was wrong at New York Common not speak up earlier? Why were the pension beneficiaries, or their representatives, not asking more questions? For that matter, where were the journalists?
The New York State pension fund had certain factors, the most significant among them being its reliance on a sole fiduciary, that make it more open to the possibility of corruption. But there is clear evidence that a pattern of abuse within the system exists. It remains to be seen if regulators, like Cuomo — who just proposed replacing New York’s sole fiduciary with a 13-member investment board — and lawmakers will come up with reforms that really make a difference.
