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Just how hard it is to keep the influence peddlers away from the multi-billion-dollar public pension funds is confirmed by a letter emerging last week from the files of city comptroller William Thompson. ¶ On April 21, amid a steady spring downpour of subpoenas and indictments from the office of State Attorney General Andrew Cuomo, a large venture capital company called Psilos Group Managers wrote to Thompson's office to say that the brokerage firm of ex–City Council president Andrew Stein would be helping to persuade city pension trustees to invest some $100 million with it.
This was less than a week after Cuomo announced his third indictment and first guilty plea in the ongoing probe of insider trading among pension fund brokers and officials. It arrived in Thompson's office the same day that the comptroller, in response to the extreme heat generated by Cuomo's investigation, was announcing his intent to ban the use of all such middlemen or placement agents by those seeking pension fund investments.
These warning blasts apparently had all the impact of a stern lecture to a heroin addict. There are, after all, millions to be made here.
Actually, Psilos's letter—obtained via a Freedom of Information request—could serve as Exhibit One for the case Cuomo has been making: that it's too often who you know—not what you know—that counts when it comes to pitching this kind of business.
For one thing, it's unclear that Psilos even needed a placement agent. City pension trustees had already approved a $75 million investment in a health care fund assembled by the same folks in 2005 called Psilos Group Partners III. Industry veterans say that when investment managers return with a similar offering it's usually considered a "re-up"—i.e., no need for a placement agent to pave the way.
For another, Psilos already had a placement agent on board when Stein was added to the mix. That agent has his own impressive connections: Marvin Rosen, head of Diamond Edge Capital Partners, is a New York lawyer with a golden Rolodex for political fundraising purposes from his days as finance chairman for the Democratic National Committee. Rosen's company holds another edge, in the form of managing director Lynn Swann, the Pittsburgh Steelers football great turned Republican political hopeful.
Since 2005, Diamond Edge has won seven separate investments totaling some $400 million from city pension funds, making it the second highest scoring broker, according to information released by Thompson's office.
All of which leaves the question as to what it is that Andrew Stein brings to the table that's so crucial to getting this deal done.
Last week, Psilos manager Jeffrey Krauss, who wrote the letter to Thompson's office, jumped off the phone when asked. "Call our San Francisco office," he said. "They'll refer you to someone."
On the surface at least, Stein's most obvious value-added—as they say in the investment trade—is his longtime political connections to Thompson and other city officials on the pension boards. Although his own campaign contributions are few, those who attend Thompson's fundraisers say Stein is a regular, as he is at many such events. He got into the business of brokering pension fund investments a few years after he quit politics in 1993, when he opted not to run for mayor. Stein quickly hit pay dirt. He successfully marketed multimillion-dollar deals to former state comptrollers Carl McCall and Alan Hevesi, both of whose campaigns he assisted.
In 2007, Stein made his biggest score when he served as placement agent on a $230 million investment by the city's pension system in a Lehman Brothers fund. The comptroller's office kept no records of placement agent fees back then, but by industry standards, the transaction was worth somewhere between $2 million to $4 million to Stein and his associates.
Actually, the director of the firm he was associated with at the time—York Stockbrokers—told reporter Sharona Coutts at the independent journalism group ProPublica last month that Stein had already left the firm when the deal went through and presumably handled it solo.
Stein has jumped from firm to firm in the brokerage business, securities records show. After York, he was unlicensed for a period of time, then found his way to a Manhattan firm called Pickwick Partners, where he only lasted a few months. "I think we didn't have the level of activity he was looking for," said David Danovitch, an attorney for Pickwick.
Last November, Stein filed his broker's registration with Network 1 Financial Securities, a New Jersey firm new to the city's pension funds. Less than a month later, he'd found a new client, a private equity firm called Avista Capital Holdings. As with Psilos, Stein was part of a package deal, handling placement agent duties together with Rosen's Diamond Edge Capital. Their goal was also the same: convince city pension trustees to invest.
According to a letter from Avista sent to Thompson's office on December 1, 2008, the brokers' fees are one-half of 1 percent apiece of whatever the city invests, up to $100 million; they get three-quarters of 1 percent each of any amount beyond that.