Markstone Co-Founder Pleads Guilty in NY Pension Probe

Elliott Broidy, co-founder of Los Angeles-based private equity firm Markstone Capital Group, last month pleaded guilty to a felony charge for bribing four senior officials who managed the New York State Common Retirement Fund.

In announcing the guilty plea, New York Attorney General Andrew Cuomo said in a statement that Broidy paid nearly $1 million in gifts to four officials in the New York State comptroller’s office and in return received a $250 million investment for the firm’s debut fund, an $800 million vehicle that closed in 2005.

“This is an old-fashioned pay-off of state officials. This is effectively bribery of state officials,” the Democratic attorney general told reporters. Cuomo added that Markstone is still being investigated.

Broidy’s guilty plea may result in a four-year prison sentence.

Ongoing Investigation

Broidy, who resigned as chairman from Markstone just prior to the guilty plea, issued a statement through an attorney that read: “Broidy regrets the actions that brought about this course of events, but is pleased to have resolved this matter with the NYAG and will be cooperating in the ongoing investigation.”

Following Broidy’s resignation, Dan Gillerman, formerly Israel’s ambassador to the United Nations, was named chairman of Markstone.

Markstone, which focuses on Israeli companies, says that it has thus far invested $562 million in 10 companies from its fund, with an overall gross IRR of 11 percent. Current investments include Israeli jewelry retailer Magnolia Silver Jewelry, and Rochester Hills, Mi.-based off-road vehicle maker TOMCAR Ltd., according to Thomson Reuters (publisher of VCJ).

The fund has already distributed $218 million to its investors, the firm said. In addition to New York Common, limited partners in Markstone include Israeli insurance company Clal Insurance Pensions and Finance Group and Oregon Investment Council.

This is an old-fashioned pay-off of state officials. This is effectively bribery of state officials.

Andrew Cuomo

NY Made Money

New York’s pension fund has reaped $64 million from its investment in Markstone and has a $156 million stake, said a spokesman for Comptroller Thomas DiNapoli. Broidy’s exit from the firm triggers a key man provision, and the pension fund can back out its remaining commitment if it wishes. The comptroller’s office is reviewing its options.

Broidy’s plea is the fifth in the kickback probe, which has focused on the placement agents that have helped investment firms obtain commitments from the $126 billion state pension fund.

Others to plead guilty include Saul Meyer, founding partner of Dallas-based private equity advisor Aldus Equity, and Ray Harding, former head of the New York Liberal Party. Alleged masterminds David Loglisci, former CIO of New York State Common, and Henry “Hank” Morris, a former placement agent, have both pled not guilty and remain under indictment.

In mid-March, Loglisci and Morris, who was the top fund-raiser for former comptroller Alan Hevesi, were charged with securities fraud, bribery, money laundering and other crimes in a 123-count indictment. Attorneys for Loglisci and Morris say both men are innocent.

Cuomo‘s probe has also looked into consultant Pacific Corporate Group and investment firms Riverstone Holdings and The Carlyle Group, which collectively have paid millions of dollars to settle their roles and have adopted the attorney general’s reform code. The code of conduct bans investment firms from hiring, using or compensating placement agents, lobbyists or other third-party intermediaries in relation to their efforts to obtain pledges from public pension funds.

$100M and Counting

Cuomo says he has recovered $100 million so far, including $18 million forfeited by Broidy.Cuomo says that Broidy’s bribes paid for medical expenses for a television actress and financed luxury travel for state officials to Israel and Italy from 2002 to 2006. Cuomo did not name the four officials who allegedly accepted Broidy’s bribes, although they no longer work for the state comptroller.Altogether, Cuomo says, Broidy paid $380,000 for a “sham” consulting deal with a family member of a senior state official and “funneled” $300,000 to the movie “Chooch,” which was produced by the brothers of Loglisci. —Joan Gralla and Jim Christie, Reuters. Additional reporting from VCJ staff