New York kickback investigation names Memphis firm; may spark scrutiny here.

/Home/Charles Ponzi and Modern Day Ponzi Schemes

New Investment Scandal?
New York “kickback” investigation names Memphis firm; may spark scrutiny here.
POSTED BY JACKSON BAKER ON TUE, APR 21, 2009 AT 9:22 AM
An extortion scandal in New York State is beginning to reverberate in Memphis, where a company named as having illegally purchased an assets-management contract from the Empire State's former comptroller is currently involved in managing assets for both Shelby County government and Memphis Light Gas & Water.
The firm is Memphis-based Consulting Services Group, which, according to a complaint by the Securities and Exchange Commission, acquired management control over New York state Retirement Fund assets by paying a kickback of $1,150,000 in 2005 to a top political aide to the state's then comptroller, Alan Hevesi. CSG was directed to pay that aide, Henry Morris, by New York's deputy comptroller, David J. Loglisci, as the price -- and the only means -- of landing the management contract.

The amount of the payment demanded was equivalent to 30 percent of the management fees that CSG would receive from the state’s Retirement Fund for managing its assets. It was formally paid to Searle & Co, a Connecticut financial services firm which employed Morris, who then pocketed 95 percent of the payment in the form of a "finder's fee."

Morris and Loglisci had previously been indicted by New York state attorney general Andrew Cuomo for their alleged involvement in "a fraudulent scheme to extract kickbacks from investment management firms seeking to manage investment assets held by the New York State Common Retirement Fund." CSG, which is but one of several firms allegedly forced to provide front-end payments to get state business, was not charged but may be providing evidence in that case as well as the SEC investigation.

At the time of the alleged payoff, CSG had for several years been serving the Comptroller's Office as a hedge fund consultant, providing services similar to those it contractually performs for Shelby County government and MLGW. The SEC complaint cites the fact of CSG's prior involvement with the New York Comptroller's office as a priori evidence of wrong-doing.

As the complaint states, "Given that CSG already had a strong relationship with Loglisci and other senior members of the Comptroller's investment staff, the statements by Loglisci and Morris regarding the need for CSG to engage Morris as a 'finder' amounted to a kickback demand. Morris did not need to, and did not introduce CSG to the Retirement Fund or perform any other legitimate placement or finding services for CSG."

The complaint also states that Loglisci "arranged for the Retirement Fund to hire CSG to create and manage an investment fund exclusively for the Retirement Fund, named Liberty Oak Capital Fund, L.P. (Liberty Oak 16 Fund)." Further: "Pursuant to this undisclosed quid pro quo arrangement, the Retirement Fund purchased a $635 million limited partnership interest in the Liberty Oak Fund between July and December of 2006 and another $130 million interest in June 2007.

"This raises all kinds of questions," said Shelby County Commissioner Mike Ritz, when apprised of the SEC complaint by the Flyer. Ritz, who had previously sought detailed information on county investments from county finance officer Jim Huntzicker, has launched his own inquiries of county officials concerning the activities of CSG.

In an e-mail sent last week to Huntzicker, Shelby County Mayor A C Wharton, District Attorney General Bill Gibbons, and fellow commissioners J.W. Gibson and Mike Carpenter (both members of the Pension Board and the four member commission investment committee), Ritz requested, "Because of the recent Madoff, Stanford, and other revelations re: bad and/or illegal investment advice, I recommend that our Pension Fund began a thorough review of every money management relationship, the circumstances of each firm's original selection to advise the Pension Fund, any charges by any party against any advisor, and any other matter the Retirement Board or Investment Committee deems appropriate."

Responding to Ritz's emails, Wharton expressed thanks for receiving them and continued, "I will see that you get your answers. ... I share the same concerns."

Huntzicker also responded, promising to "see that our Board exercise its 'due diligence' on this matter and all other contractual relationships." The county CFO said that CSG received a "base consulting fee" of $110,000 from the county "for investment advice and certain reporting functions, as well as additional fees for special manager searches and hedge fund monitoring."

County retirement-systems manager David Pontius would add that CSG "were originally hired in 1985 and we did a national search (April 2007) and re-hired them."

UPDATE: The Flyer received the following communication from CSG attorney Edward R. Balsmann:

On March 19, 2009, the Securities and Exchange Commission (“SEC”) filed a civil complaint against Henry Morris, David J. Loglisci and associated parties (the “Complaint”) relating to the New York State Common Retirement Fund (“Retirement Fund”). CSG fully cooperated with the SEC’s investigation and is not a party to the litigation.

The SEC’s Complaint includes information about the Liberty Oak Capital Fund, L.P. (“Liberty Oak Fund”), which was a limited partnership established in June 2006 and designed by counsel for the Retirement Fund as a single purpose entity through which capital of the Retirement Fund would be allocated to a customized portfolio of hedge fund investments. CSG, as general partner of the Liberty Oak Fund, managed the hedge fund investments of the Liberty Oak Fund for the benefit of the Retirement Fund. As part of the Retirement Fund’s 2008 Strategic Plan, it was determined that the investment staff of the Retirement Fund would make direct investments in hedge funds thereby eliminating the need for the Liberty Oak Fund. In April 2008, the Liberty Oak Fund was dissolved. CSG continues to assist the investment staff of the Retirement Fund in the dissolution process.

The SEC’s Complaint contains allegations that a solicitation agreement (the “Agreement”) between CSG and a registered broker-dealer, Searle & Co., was not disclosed to the Retirement Fund. No claims have been made against CSG relating to the disclosure of this Agreement and CSG disputes the accuracy of the allegation that the Agreement was not disclosed. In fact, during the joint investigation conducted by the Office of the New York Attorney General (“New York Attorney General”) and the SEC, CSG provided numerous documents that demonstrated the disclosure of the Agreement to both the appropriate employees of the Retirement Fund and outside counsel to the Retirement Fund, Morgan Lewis and Bockius.

Additionally, on March 26, 2009, CSG, through its outside legal counsel, sent a letter to the SEC’s New York office detailing the full disclosure of the solicitation agreement as explained above in this email and in that letter requested that the SEC take immediate action to correct the inaccurate allegations involving CSG’s disclosures that were contained in the SEC’s complaint. Further, on March 27, 2009, the firm’s outside legal counsel sent a letter to the New York State Attorney General’s office requesting that the Attorney General’s office provide the SEC with any documentation that it possessed that confirms that CSG’s solicitation agreement was in fact disclosed by CSG.