I am writing today to announce the closure of the New Mexico Independent. After three and a half years of operation in New Mexico, the board of the American Independent News Network, has decided to shift publication of its news…
Scrutiny of state investments, use of finder fees gain steam
A legislative committee has scheduled a hearing today to review the role of third-party marketers in state investment deals.
Third-party marketers, until recently, were obscure figures in the investment world who acted as matchmakers between private equity and hedge funds and states looking for a good return on their money.
But now as a scandal that originated in New York has spread to New Mexico due to a criminal probe, those players and what they were paid have come under increasing public scrutiny.
Of particular interest to state lawmakers is the $16 million or so that Marc Correra — the son of an associate of Gov. Bill Richardson – shared in finders’ fees as a third-party marketer on dozens of state investment deals over the past half-dozen years.
Richardson administration officials acknowledge that they didn’t pay attention to who received the finders’ fees or how much they were paid in recent years, focusing instead on ensuring that the state earned a healthy return on its investments. Fund managers paid the finders’ fees if the managers were successful in winning state investments in their funds.
“It wasn’t a priority to ask information about subagents from 2005 until last year,” says Charles Wollman of the State Investment Council, one of the state’s two major investment committees. “Our concentration was on things that would protect the investment if the investment went bad. But we weren’t always in tune with getting this disclosure.”
Overlooking that important detail — who got paid when certain firms won lucrative state contracts — has caused controversy in New Mexico, New York and elsewhere in recent weeks.
It has led some New Mexico lawmakers and others to accuse the Richardson administration of not paying enough attention to the issue. And one legislative leader has gone further, leveling influence-peddling charges at the Richardson administration and exhorting lawmakers to take a more hands-on approach in overseeing state investments.
“The tangled and troubling tale that has emerged is one in which politics seems to have played a role equal to that of investment fundamentals in the decisions as to how the state invests billions of dollars of trust funds,” New Mexico Senate President Pro Tem Tim Jennings wrote in a letter.
Richardson’s spokesman said that Jennings was mistaken in the details of the scandal.
When asked recently if he had set the tone for his administration, which has been criticized for sometimes moving quickly on programs and for having a blind spot for details, Richardson rolled his eyes.
The governor, who had just gotten into a black state SUV, didn’t answer the question as the door closed and the vehicle drove off.
New Mexico investments come under microscope
State lawmakers’ concerns with the state’s investments fall into three categories: who received the finders’ fees; how much were they paid; and whether the practice of paying third-party marketers crossed the line between legitimate business practices and influence peddling.
Those concerns burst into public scrutiny because of a criminal probe in New York that unearthed what that state’s attorney general said were questionable practices here in New Mexico.
Among the allegations were that the founder of New Mexico’s former financial adviser, Aldus Equity, helped the son of the New York state comptroller, Alan Hevesi, win a lucrative contract in New Mexico for a firm he was representing in return for Aldus’ increased business in New York, according to a criminal complaint. At the time, the comptroller’s son, Dan Hevesi, was acting as a third-party marketer. Aldus’ founder, Saul Meyer, was charged in the New York criminal probe.
The charges against Meyer throw into question whether Aldus – which as the state’s investment adviser was supposed to vet the safety and risk factor of state investments — had always acted in New Mexico’s best interest, officials said.
The allegations also prompted New Mexico policymakers to turn their focus on who else was paid as third-party marketers in the state’s investment deals.
That is where Marc Correra enters the picture. Correra, the son of Richardson friend Anthony Correra, acted as a third-party marketer in dozens of state investment deals, state records show. He was not involved in the Hevesi deal, but one deal he was a part of — which earned $2 million in fees that he may have shared in — has generated its own scrutiny.
A five-page document released last week by the Educational Retirement Board suggests that Correra earned $2 million on a controversial deal involving Vanderbilt Financial Trust that cost the state $90 million in losses.
It is unclear if Correra ever met with the governor or his staff to discuss the proposal Vanderbilt Financial Trust pitched to the state prior to the state’s decision to invest.
Gilbert Gallegos, the governor’s spokesman, did not answer last week if the governor had met with Correra to discuss the proposal prior to the state’s investment. Correra’s attorney, contacted Friday, did not answer either.
The state’s $90 million loss is the subject of a lawsuit filed by a former investment officer at the Educational Retirement Board. The former officer, Frank Foy, has alleged that there was a pay-to-play culture in how the state made investments and cited the Vanderbilt deal in particular. Officers at the State Investment Council and Educational Retirement Board, as well as Richardson administration officials, have vigorously denied Foy’s allegations.
Foy’s attorney declined to comment.
Third-party placement agents, also known as marketers
Because of the scandal in New York and New Mexico, many states are looking into the practice of finders’ fees.
State officials say third-party agents serve a legitimate role in the investment world. Fund managers hoping to win state business pay the third-party marketers to perform a much-needed service, they argue.
“They make introductions,” Wollman of the State Investment Council said. “They will do the leg work for you, they will do the marketing. They knock on institutional investors doors’ three to every four years. I am probably not going to want to invest in marketing teams for that three or four years. Instead when I need a marketing team, that’s when I come out and hire people with expertise. They also know the markets.”
Third-party agents exist primarily because of how the high-flying world of alternative investments works.
Many of these funds seek investments every three to four years, meaning they may not employ a full-time marketing staff to go out and solicit business, Wollman said.
The Third-Party Marketers Association, as quoted in a legislative report written this year, says that marketers “assist in increasing institutional assets for their… investment manager clients” and are needed “due to the long and at times arduous process of soliciting a direct investment of public money.”
There are several ways that such marketers are used, as illustrated by a graph in the report.
But the most popular approach with hedge and private equity funds, the report said, was for an investment manager to use a marketer and to go through an investment adviser. In New Mexico’s case, that would have been Aldus.
As a result of Aldus’ role in the New York scandal, the FBI has already questioned officials from the State Investment Council and Educational Retirement Board about the Dallas-based firm.
The use of third-party agents increased in New Mexico investment deals after the state passed a law in 2005. The law allowed the state to sink its money into what is known as alternative investments – often deals involving hedge funds, private equity funds and collateralized debt obligations, which are riskier than many investments.
After the law passed, “all state investment agencies began to move aggressively into a variety of alternative investments,” says the legislative report. It accompanied a bill that cleared the Legislature and was signed into law by Richardson that would have required more disclosure about third-party marketers.
That law appears moot now.