The mere mention in New York Attorney General Andrew Cuomo's indictments and the SEC's civil pay-to-play lawsuit was enough to induce three private equity firms to pay damages without ever being sued.
Executives close to the situation said the firms — private equity money managers Riverstone Holdings LLC and Carlyle Group and an affiliate of private equity consulting and fund-of-funds manager Pacific Corporate Group Holdings LLC — wanted to get the whole affair behind them and put an end to a two-year investigation.
None wants to repeat the experience of Aldus Equity Partners, which lost investors at a rapid clip, even before Mr. Cuomo sued the consulting and fund-of-funds firm in May.
Riverstone and Carlyle were mentioned in indictments of Henry Morris — a political consultant and fundraiser for Alan Hevesi, the former New York state comptroller — and David Loglisci, the former chief investment officer of the $109.9 billion New York State Common Retirement Fund, Albany, for allegedly taking kickbacks in exchange for placing investments with New York's largest pension fund.
PCG was mentioned only in an SEC complaint.
So far, none of the firms has settled with the Securities and Exchange Commission, and Riverstone executives mentioned in the SEC complaint have not settled.
Riverstone's statement after settling with Mr. Cuomo on June 11 emphasized that the firm was doing it for its investors: “For our investors and the firm, we believe we have reached the right decision through this resolution.”
Carlyle spokesman Christopher Ullman said: “We are cooperating fully with the investigation. “
A PCG spokesman wouldn't comment.
Meanwhile, all three firms adopted Mr. Cuomo's Code of Conduct, which, among other things, bars investment managers from hiring third-party marketers or placement agents.
Carlyle Group was the first to settle, agreeing on May 14 to pay $20 million to New York Common. Riverstone is paying $30 million, and PCG Corporate Partners Advisors II, a PCG subsidiary, is returning $2 million of the $16 million in fees earned from New York State Common.
The settlements remove a potential stumbling block to getting new commitments from investors. Search questionnaires routinely ask whether the vendor has been sued or is under investigation, noted Stephen L. Nesbitt, CEO of alternative investment consultant Cliffwater LLC, Marina del Rey, Calif.
“Whenever a firm is under investigation, it raises organizational risk” that is avoidable. he said.
Existing managers and consultants, on the other hand, are treated differently. “When they are an existing vendor, investors will wait to the conclusion” of the matter, Mr. Nesbitt said. “Changing vendors has a cost.”