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New Scandal?

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



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 (CSG), 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, Davis 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 that 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 wrongdoing.

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 wrote: "Because of the recent Madoff, Stanford, and other revelations re: bad and/or illegal investment advice, I recommend that our Pension Fund begin 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 e-mails, Wharton expressed thanks for receiving it and wrote, "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 added that CSG "was originally hired in 1985 and we did a national search [in April 2007] and re-hired them."

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