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Rattner Hoisted On His Own Petard

Edward Jay Epstein is onto this story, and that is bad news for Steve Rattner. The Times and the Wall Street Journal also know a rotten tale when they see one. And, if Rattner tries to wave it away as a matter of no consequence, he will being getting himself deeper and deeper into the ethical quicksand.

Is The Car Czar Due For A Recall?

By Edward Jay Epstein

"It is unacceptable that a placement agent have any influence in the investments of the state pension fund," New York Governor David A. Paterson, April 22, 2009

On March 29th 2009, Steven Rattner, President Obama's new car czar, met with Rick Wagoner, the chairman of General Motors, in Rattner's new office in the Treasury Department, and in one of the most dramatic confrontations of the Obama administration in its first 100 days told him he would have to resign because he had lost the confidence of the Obama Administration. Wagoner, a 30-year veteran of GM,  fell on his sword. Now, less than a month after disposing of Wagoner, Rattner may confront a similar decision about his own tenure.
His dilemma proceeds from his entanglement in the unfolding scandal and investigation involving politically connected "placement agents."  These agents of influence have commonly been used by Wall Street buy-out firms to get tens of  billions of dollars worth of investments from pension funds. What brought Rattner into the investigative cross-hairs was that in 2005 he had employed Henry "Hank" Morris, a top advisor for then-New York State Comptroller Alan Hevesi, to act as his placement agent in getting  the New York State Common Retirement Fund to invest $100 million in his firm's buy-out deals. In March 2009, Morris was arrested and charged in a 123-count criminal indictment for, among other things, "enterprise corruption" in regard to selling access to New York's pension fund. And that triggered  New York State Attorney-General Andrew Cuomo to intensify his investigation of Wall Street firms that employed Morris.
Up until that point, Rattner, a 56-year-old former New York Times reporter, had a golden career in investment banking. Before joining the Treasury Department in 2009, he was a star at Morgan Stanley and then at Lazard Freres, where, among other things, he acted a placement agent in arranging investments for Providence Equity Partners in return for one percent of the money he found for it as well as one-third of the fees earned by Providence. Then, in 2000, he co-founded his own firm, Quadrangle Group, which specialized in raising money for leveraged buy-outs in the communications industry.  The largest source of money for such buy-out funds was pension funds, which collectively manage about $2.3 trillion. Seeking access to state and municipal funds, he wound up using the services of Morris with the New York State Common Retirement Fund, the New York City Employee Retirement System, the Los Angeles Fire and Police Pension System, and the New Mexico Pension Fund.
It is perfectly legal in most states for a buy-out fund to pay fees to placement agents to steer public pension funds into its deals so long as it disclosed these fees. Such disclosures are necessary to identify possible conflicts of interest. Quadrangle, however, apparently failed to make the required disclosures in the case of New York City's pension since the New York attorney general's office is now investigating whether New York City Pension Funds "were intentionally misled or deceived" by Quadrangle's failure to disclose paying finder's fees to Hank Morris's firm.

The attorney general's office also is investigating whether Quadrangle evaded crucial reporting requirements by having a subsidiary it controlled
pay $88,000 for the DVD rights to  movie that was co-produced by David Loglisci, New York's deputy comptroller, who was an associate of Morris, and,
along with Morris, was indicted on corruption charges in March. The low budget movie entitled "Chooch"--an Italian expression for a bumbling idiot­--lost
about $700,000 after a brief run in 3 theaters which took in less than $40,000, which would greatly reduce the value of the DVD. According to four studio
executives that deal with DVD distribution, the DVD rights to "Chooch" would have little, if any, cash value. As one explained to me in an email: "It would be worth  zilch since it would cost more to manufacture the DVDs than a distributer ever realistically hope to make from their sales."  Such bleak assessments explain why the rights were not sold to through the usual DVD distribution channels and why money was needed from Rattner's company.   

Three weeks after buying these DVD rights, Quadrangle got its $100 million. Adding to the intrigue, another giant fund, the Carlyle Group, which also used Morris' firm to get money from the New York State pension fund, made a similar investment in "Chooch." The key investigative question is: Did these masters of the universe see "Chooch" as a profitable venture in itself or as a route to another mother lode­ namely the$122 billion New York State's pension fund for which its co-producer Loglisci was the top investment officer. Among the charges against Loglisci (as well as Morris) is "money laundering."
Rattner himself may well be innocent as the driven snow in making payments of more than a million dollars to Morris' placement agent company and his foray into the "Chooch" venture. But like Caesar's wife, Obama's car czar needs unimpeachable credibility to  persuade unions, employees, bond-holders, share-holders and suppliers in Detroit to make painful sacrifices for the common good of the industry. Not only is the New York Attorney General investigating these charges­ with law officers in California, New Jersey, and New Mexico closely monitoring the investigation but the SEC has its own ongoing investigation of these transactions. 

Amid these burgeoning investigation and  the upcoming trials of Morris and Loglisci in New York, a trial in which Rattner may be involved, it will be difficult for the car czar to maintain his Caesar's Wife status. At a very minimum, the ensuing questions will be a distraction that Obama does not need in his efforts to save Detroit. Just as Rattner had the courage to ask Wagoner to retire for the good of General Motors, he might be prompted to consider the same course of action for himself.