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2 L.A. private equity firms adopt New York ethics code on placement agents

Ares Management and Freeman Spogli had used intermediaries to secure business with the New York State Common Retirement Fund. New York Atty. Gen Andrew Cuomo says they have agreed to end the practice.

February 18, 2010|By Marc Lifsher

Reporting from Sacramento — Two Los Angeles private equity firms that did business with a New York state pension fund have adopted a code of ethics that prohibits the use of controversial sales intermediaries and bars campaign contributions to pension fund board members, New York Atty. Gen. Andrew Cuomo announced Wednesday.

The code goes far beyond current and proposed similar policies at the California Public Employees' Retirement System, known as CalPERS, the country's largest public pension fund.

The two firms, Ares Management and Freeman Spogli & Co., both used so-called placement agents to secure business with the New York State Common Retirement Fund.

Neither company has been accused of wrongdoing by the New York attorney general, nor have they been required to pay any financial penalty.

The New York and California retirement systems have been embroiled to various degrees in a national scandal involving alleged influence peddling by placement agents.

Cuomo's investigation has resulted in a number of people being charged with crimes, including associates of a former New York state comptroller.

In California, CalPERS has opened an internal inquiry into placement agent activities, while the U.S. Securities and Exchange Commission and the California attorney general have opened their own probes.

The agreements with Cuomo, signed Feb. 1, detail a December 2003 investment of $50 million in Ares by the New York State Common Retirement Fund and a January 2004 investment of the same amount with Freeman Spogli.

In both instances, the private equity investment managers used the same sales intermediary, Wetherly Capital Group of Los Angeles, to help put together the deals. According to Cuomo's investigation, Wetherly paid part of its fee to Henry "Hank" Morris, who at the time was the paid political advisor to then-New York State Comptroller Alan Hevesi.

Neither Ares nor Freeman Spogli was aware of Wetherly's arrangement with Morris, Cuomo said. Morris has pleaded not guilty to corruption charges.

Last week Cuomo announced a legal settlement with Wetherly. The firm, which was not accused of illegal acts, agreed to pay $1 million to the state of New York, sign the code of conduct and stop serving as a placement agent in deals with public pension funds.

The code of conduct, which has been signed by 11 major investment firms, prohibits placement agents, lobbyists or any third-party intermediaries from communicating with public pension funds.

It also bars investment firms and related individuals from doing business with a public pension fund for two years after making a campaign contribution to any elected or appointed official in a position to influence a public pension fund investment decision. The code contains rigorous disclosure and conflict-of-interest provisions.

Ares and Freeman Spogli issued statements saying they endorsed the code because it creates greater transparency in public pension fund investment decisions.

The code, which applies to all public pension fund investment matters nationwide, "is fast becoming the new industry standard," Cuomo said.

CalPERS' current and proposed restrictions are more narrow.

The fund now requires investment managers to disclose the names of placement agents and the fees paid to them.

A fund-backed bill now in the state Legislature would make placement agents register as lobbyists and would prohibit them from being paid commissions that are a percentage of an investment commitment. The bill also bars political contributions to board members from placement agents and investment funds.

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