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N.M. Investment Adviser Caught Up in N.Y. Scandal

By Mike Gallagher
Copyright © 2009 Albuquerque Journal
Journal Investigative Reporter

          A company that advises the New Mexico State Investment Council and the Educational Retirement Board is embroiled in a pay-to-play scandal involving the $122 billion New York state pension fund.
        On Thursday, the New York Attorney General's Office filed a 123-count indictment against the retirement fund's investment officer, David Loglisci, and Henry Morris, a high-profile political operative in New York.
        The indictment and a civil complaint filed by the Securities and Exchange Commission says:
        • Morris and Loglisci ran a pay-to-play scheme in which investment firms had to kick back part of their fees to get work with the New York pension fund. The payments allegedly went to Morris, who then distributed the money.
        • Aldus Equity Partners, (which advises both the State Investment Council and Educational Retirement Board in New Mexico) is one of the companies that split fees or paid kickbacks in New York and failed to disclose the payments in regulatory filings.
        • Morris tried to hide his financial relationship with the investment firms through a web of offshore companies and straw men. When companies balked at paying Morris "finder's fees" the investment work went to other companies.
        • Aldus Equity Partners was recruited to manage the New York pension fund's "emerging fund portfolio." Although Aldus was already in discussions with the retirement fund's staff about taking over the portfolio, it still agreed to pay 35 percent of its fees on the deal — or $319,374 — to a company Morris owned.
        • Aldus was also pressured to invest in companies that were paying Morris.
        State Investment Council spokesman Charles Wollmann said Aldus is "our private equity adviser. They do the due diligence on investments we make in the private equity sector."
        None of the companies has been charged with a crime.
        In New Mexico, the State Investment Council has put about $350 million into private equity funds that in turn use the state's money to invest in privately held companies. The state currently has private equity investments in about 150 companies. Dallas based Aldus Equity is paid $905,000 a year for advisory work for the State Investment Council and $750,000 a year for work for the Educational Retirement Board.
        Investment Council spokesman Charles Wollmann said state officials have concerns about Aldus' involvement in the New York scandal.
        "We have had some discussions with Aldus about this," Wollmann said. "We've been clarifying some things with them."
        Six other investment firms named as paying kickbacks to Morris hold New Mexico investments, according to the State Investment Council. The state has more than $1 billion invested with 150 firms.
        Wollmann said it was his understanding Aldus terminated its relationship with Morris in 2006 and said the State Investment Council was "making sure that Henry Morris was not involved in any of our investments."
        Bob Jacksha, chief investment officer for the Educational Retirement Board, said Aldus has been the board's private equity adviser since late 2006.
        "It is our understanding they are a witness in the case," Jacksha said. "We will continue to monitor the situation."
        Aldus Equity said in a statement that it ended its relationship with Morris in 2006, more than a year before the investigation began and, "Throughout the term of the relationship, Aldus had no knowledge that Morris was engaged in wrongdoing."
        Pay-to-play
        The New York charges are reminiscent of the criminal prosecutions of former New Mexico treasurers Michael Montoya and Robert Vigil, both of whom were accused of taking money in return for state business.
        Both are in federal prison.
        The New York case differs from two other so-called pay-to-play controversies involving New Mexico state government.
        The current federal investigation into New Mexico's involvement with a California financial firm, CDR Financial Planning, focuses on whether political contributions factored into the company getting state business.
        A second controversy involves a former investment official with the New Mexico Educational Retirement Board who filed a civil lawsuit stemming from the state's loss of $90 million invested in securities that included sub-prime mortgages.
        Frank Foy claims in his lawsuit that the investments were made as part of a pay to play scheme.
        The lawsuit names various state officials and financial firms, all of whom deny Foy's allegations in the strongest language.
        The administration of Gov. Bill Richardson has denied allegations of wrongdoing in both cases.
        More disclosure
        According to the indictment and civil complaint, the New York state retirement fund invested billions of dollars with equity firms and hedge funds. The firms getting the lucrative investments had to share a portion of their fees with Morris, a political adviser to then-state Comptroller Alan Hevesi, who oversaw the retirement fund.
        Morris was a political adviser to Hevesi and Loglisci.
        According to the SEC complaint, companies like Aldus and others that made payments to Morris were obligated to disclose the payments to the retirement fund.
        In addition, as an adviser to the pension fund, Aldus had a fiduciary duty to report the scheme to a board that oversees the fund but failed to do so.
        Wollmann said New Mexico officials want Aldus to disclose more information to the Investment Council about so-called finder's fees and placement agents that might be involved in New Mexico investments.
        "There is nothing inherently wrong with having placement agents who market a company," Wollmann said. "We just want more disclosure about the arrangements with them."
        The State Investment Council publicly discloses all placement fees on private equity investments.
        Wollmann added, "We don't believe we had any contact with Morris."
       



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