Corruption Case Stirs Trouble –

HARTFORD, Conn. – A corruption scandal at the State of Connecticut Treasury Department is casting a harsh light on private equity fund-raising practices and on several private equity firms that may have granted favors and paid unusual fees to obtain commitments from the pension – fees that later found their way into the pockets of former state Treasurer Paul Silvester and his associates, according to Connecticut’s U.S. District Attorney’s office.

The scandal is causing a political firestorm in Connecticut, and some elected officials there are demanding an overhaul of the state’s pension system.The fallout from this case may alter the nature of fund raising among state pensions, industry sources say.

Silvester, who last November lost a re-election bid to manage Connecticut’s $20 billion pension fund, his brother Mark Silvester and brother-in-law Peter Hirschl pleaded guilty in September to racketeering, bribery and money-laundering charges related to their dealings with five private equity funds, which the district attorney’s office did not name.

Court papers do not indicate that any private equity firm involved in the investigation knowingly paid a kickback, and no firm has yet been charged with wrongdoing. But the scandal is creating embarrassing publicity for a handful of groups with which Silvester made commitments, including Landmark Partners Inc., The Carlyle Group and Triumph Capital Group, among others.

At least one buyout firm has taken steps to preemptively allay investor concerns related to the case. Thayer Capital Partners recently sent a letter to its limited partners stating the firm paid no improper fees in the course of marketing its fund.

Silvester first raised suspicions about his investment practices when, after losing to current Treasurer Denise Nappier, he assigned $845 million in alternative asset commitments in his final three months on the job (VCJ, June, page 6). Nappier currently is trying to pare back Connecticut’s commitments with many of the funds on the grounds the pension now is overallocated to the asset class.

According to the district attorney’s office, some of those eleventh-hour commitments amounted to personal favors. But court documents also allege that Silvester was using his office to enrich himself and his friends well before he lost the election.

Specifically, the district attorney’s office charges that Silvester committed corrupt acts in his dealings with five private equity funds, identified only as Funds #1 through #5, between April 1998 and February 1999:

* In the case of Fund #1, Silvester allegedly requested that a “finder’s fee” be given to an associate of his in exchange for his placing Connecticut’s capital with the fund. According to the district attorney’s office, Silvester then placed money with Fund #1 once before he lost the November election and again shortly before he left office. Silvester later received a portion of the finder’s fee from the associate, who was not a placement agent representing Fund #1, according to court documents.

* The district attorney’s office alleges that Fund #2 originally approached Silvester through a placement agent, but the treasurer did not commit capital to the fund until a fee was paid to an associate of his with no connection to the investment fund.

* After losing the election, Silvester made a commitment to Fund #3 after getting an assurance from an associate with a connection to the fund that the associate would hire certain treasury office employees whose jobs were in jeopardy as a result of the loss, court documents allege.

* Silvester secured a job for himself through an investment in Fund #4, which was promised to him by an associate with an interest in the fund, according to the district attorney’s office.

* The treasurer invested in Fund #5 after getting assurances from the partners that they would award multi-million dollar consulting contracts to two of Silvester’s associates, according to the documents. One of the two associates, New York lawyer Christopher Stack, was named in the court documents as a key participant in a scheme to deliver as much as $46,000 in laundered cash to Silvester through a system of fraudulent legal bills, and Silvester used this money to finance his campaign and pay off personal debts, the documents allege.

Silvester’s brother also allegedly received money from an unnamed consultant in New York City, to whom Silvester had referred private placement business, and used some of it to buy two boats and take a trip to the Caribbean, according to court documents.

Press Reports Name Names

A spokesperson for the district attorney’s office declined to disclose the names of the private equity funds mentioned in the court documents. This has not prevented the media from attempting to fill in the blanks, bringing unwanted publicity to a number of private equity firms. A Connecticut newspaper, the Hartford Courant, claims its sources have identified many of the district attorney’s office’s unnamed funds and associates.

The paper reported that Fund #1 is Landmark Private Equity Fund XIII, to which Silvester committed $100 million in July and another $50 million in December, after he lost the election.

Adding fuel to the media frenzy is the fact that one of the firm’s managing directors is Francisco Borges, who was Connecticut’s treasurer from 1987 to 1993. Borges, however, joined Landmark after Silvester’s commitments had already been made. Borges declined comment on the case.

A source close to Landmark said the firm has never paid improper or illegal fees to secure a private placement.

The New York Times also has mentioned Carlyle’s name in connection with the disgraced treasurer. After Silvester left office, he started work at Park Strategies, a Washington consulting firm founded by Wayne Berman. While Silvester was still in office, Berman, also a top fund-raiser for the presidential campaign of George W. Bush, reportedly introduced Silvester to partners at Carlyle, which has as an adviser former President George Bush. Connecticut subsequently invested $50 million in Carlyle’s Asia fund.

Yet again, investigators have made no official comment on these press reports, but Carlyle, a self-styled politically-connected firm, cannot be relishing the attention.

To complicate matters, the sequence of events reported in the Times bears striking similarities to the U.S. district attorney’s description of Silvester’s dealings with Fund #4, in which the treasurer made an investment in exchange for a job.

A partner at Carlyle said his firm had done nothing wrong and was cooperating fully with the investigation. A source close to the firm added, “[Carlyle] was completely unaware of the side deals which, apparently, Silvester had with Berman.”

The source did not comment on whether Carlyle had paid a fee to Berman, but noted that such fees are legal when paid to registered investment advisers.

Berman has stopped working for George W. Bush’s campaign while the investigation continues.

Triumph Capital also has been fending off unwanted attention since the Courant reported that its sources had identified the Boston private equity shop as Fund #5.

Public records show Triumph Capital received $200 million of Connecticut’s money from Silvester in January. After Silvester left office, his ex-aide, Lisa Thiesfield, reportedly went to work as a consultant at Triumph Capital.

A spokesperson for Triumph declined comment on the case, saying only the firm had done nothing improper.

Washinton, D.C.-based Thayer Capital is taking no chances with its reputation.

The firm, which in March held a final close on $880 million for its fourth buyout fund, originally had approached Connecticut through placement agent Merrill Lynch & Co., but failed to secure a commitment for its fund, according a source connected to the fund raising.

Later, the source said, partners at Thayer approached Silvester directly about investing in the fund, and Silvester committed $75 million. The scenario bears a distinct resemblance to the one outlined by the U.S. district attorney’s office in its allegations related to Fund #2.

The source said Merrill Lynch had no knowledge of any fees being paid by its former client to associates of Silvester.

Partners at Thayer Capital did not return calls, but a source close to Thayer said the firm has sent out a letter to investors which stated it paid no fees, other than to Merrill Lynch, to facilitate the raising of its fund.

Thayer Capital is headed by Fred Malek, who worked on the presidential campaign of the elder George Bush and, much earlier, as an aide in the Nixon White House.

Current treasurer Nappier is demanding that companies that have done business with Connecticut over the past nine years disclose all fees related to the pension’s fund commitments. The disclosure order reaches back into the tenure of Landmark’s Borges.

Nappier also reportedly is looking into the possibility of suing any investment firms that took part in the payment of kickbacks. She has made pointed comments to the press that she will not tolerate investment firms who seek to influence-peddle through finder’s fees.

A placement agent source said the payment of finder’s fees to people other than registered placement agents was unusual in the private equity world. Nappier herself has admitted that there is not enough information yet to implicate any private equity firm of wrongdoing.

Part of Nappier’s efforts to reverse the damage done by Silvester has been to try and get back some of the capital committed by Silvester in his final months. So far, the treasurer has succeeded in rounding up a total of approximately $150 million from Carlyle, Triumph and Thayer, among other groups.

A lawyer who assists in raising funds for private equity groups, who asked to speak on background, said one possible effect of the scandal will be the increased scrutiny of Connecticut’s sole-trustee pension structure. Most other state pension managers, New York’s Carl McCall being a notable exception, are appointed by and report to a board. “If I were the state of Connecticut, I would think it does not make sense to have one human being in charge of the investment process,” the lawyer said. “It’s just asking for problems.”

The lawyer added he expects the scandal to cause buyout firms to more strictly monitor their contract negotiations when fundraising with state pensions. “This investigation is going to cause a tightening in the industry,” he said.

Silvester faces a maximum term of 40 years in prison. He will be sentenced March 20.