Two L.A. firms to pay settlement in probe of New York ‘pay-to-play’ scandal

Reporting from Sacramento — 

Two Los Angeles companies embroiled in a New York state pension fund corruption scandal agreed Monday to pay a total of $19 million to settle a state investigation into the “pay-to-play” scheme.

Wetherly Capital Group and Markstone Capital Group also agreed to adhere to a public pension reform code created by the New York attorney general’s office to halt illegal pay-to-play arrangements, which typically benefit politicians and overly compensate intermediaries.

Wetherly and Markstone were not accused and did not admit any wrongdoing in the civil settlement.

Separately, a California lawmaker introduced a bill Monday in the Legislature to require pension fund intermediaries, more formally known as placement agents, to register as lobbyists.

But the New York agreement puts stronger restrictions on Wetherly and Markstone by ending “pay-to-play political contributions and the selling of access to public pension money nationwide,” said Atty. Gen. Andrew Cuomo.

Markstone and Wetherly said they were pleased to have reached legal settlements with New York state prosecutors, who had settled with seven other placement and investment fund managers previously.

“This enables us to move forward with our core business, investments in Israeli companies,” said Dan Gillerman, chairman of Markstone.

Wetherly founder Dan Weinstein said that his firm was “very pleased to have resolved all issues” and that it supported Cuomo’s proposals “because we think they are good for the industry.”

Under the settlement, Wetherly and its broker-dealer affiliate, DAV/Wetherly Financial, will pay $1 million to the New York State Common Retirement Fund. Wetherly also said it would no longer serve as a sales intermediary helping investment fund managers win business from government pension systems across the nation.

Markstone will return $18 million, a figure first reported in December when Markstone’s founder, Elliott Broidy, pleaded guilty to charges that he paid $1 million to New York officials to win $250 million in investment capital.

Both companies also have business ties to the California Public Employees’ Retirement System, the nation’s biggest public pension fund. CalPERS has been caught up in its own controversy involving sales through intermediaries.

According to Cuomo’s office, Wetherly was paid in excess of $1.3 million in fees for directing New York pension funds to three California private equity firms: Ares Management, Freeman Spogli & Co. and Levine Leichtman Capital Partners.

In each instance, Wetherly split its fees with Henry “Hank” Morris, a top political advisor to then-New York State Comptroller Alan Hevesi, Cuomo’s office said. The three firms were not aware of the arrangement with Morris, and Morris has pleaded not guilty to political corruption charges.

A Wetherly employee, Julio Ramirez Jr., made an arrangement with Morris, Cuomo’s office said. Ramirez pleaded guilty to a New York state securities fraud charge last May and has been cooperating with investigators.

Broidy, beginning in November of 2002, gave more than $1 million in gifts, political contributions and other benefits “to top decision makers” as well as their friends and family members, with the intent to influence state officials to invest in a Markstone private equity fund, Cuomo’s office said.

In return, Markstone got a $250-million investment and earned $18 million in management fees.

Weinstein, 51, a longtime Democratic Party activist and political fundraiser, has worked in a number of campaigns statewide and has been part of real estate developments and related businesses.

He founded Wetherly in 2001 along with three partners.

In Los Angeles, Broidy, 52, a Republican Party stalwart, gained a reputation for philanthropic work on behalf of the arts, education and the Jewish community.

Last May he resigned from the Fire and Police Pensions board after the U.S. Securities and Exchange Commission asked him to turn over financial records and to disclose whether he had done business with any company that came before his board.

Cuomo’s ongoing investigation is the most high- profile of several inquiries being conducted by federal and state law enforcement agencies into placement agent activities in California, New Mexico and other states.

The SEC has issued subpoenas to former members of the CalPERS and L.A. Fire and Police Pensions boards.

California Atty. Gen. Jerry Brown also said he was looking into placement agents.

CalPERS hired a Washington securities lawyer in October to investigate the payment of more than $125 million in commissions paid by investment managers to politically connected placement agents, including Wetherly, that helped them open doors at the $200-billion government retirement plan.

CalPERS also has invested in Markstone’s private equity fund focusing on Israeli companies.

marc.lifsher@latimes.com