May 14 (Bloomberg) -- Carlyle Group agreed to end “pay to play” tactics in its public pension fund business and pay $20 million to resolve a corruption probe by New York Attorney General Andrew Cuomo.

Under the agreement, Carlyle will adopt new a public pension fund “code of conduct,” which bans investment firms from using placement agents or other third parties to negotiate with public pension funds to obtain investments. It also prohibits firms from doing business with a public pension fund for two years after the firm or its employees make a campaign contribution to a public official who can influence the fund’s investment decisions.

“By banning campaign contributions to those who have sway over pension funds and eliminating the third-party intermediaries that have become dens of corruption, we will ensure reform,” Cuomo said in a statement. “I commend Carlyle for being the first to embrace the Reform Code and leading the industry toward critical change of the public pension investment system.”

Carlyle executives will not be subject to any criminal liability, Cuomo said at a press conference. Carlyle is the second-biggest private equity firm after New York-based Blackstone Group LP. Founded by David Rubenstein with William Conway and Daniel D’Aniello in 1987, it manages about $85.5 billion in assets.

Code of Conduct

“This is a revolutionary agreement,” Cuomo said. “I believe it totally changes the way people operate. It ends pay- to-play. It bans the selling of access. It puts the political power brokers out of business.”

Cuomo’s “Public Pension Fund Reform Code of Conduct” signed by Carlyle follows other such codes he has gotten other industries after finding conflicts of interest in how they operate, including in student loan and health care probes. Cuomo typically gets one company to agree to the code and others follow suit.

Cuomo began to investigate the $122 billion New York State Common Retirement Fund about two years ago. Since then his probe has expanded beyond New York and a multistate task force was formed. His office and the SEC say they are investigating money managers and their placement agents who used ties to public officials and kickbacks to buy and sell access to the $2 trillion in U.S. public pension systems.

Individuals Charged

Cuomo has charged several individuals in the probe, including Henry “Hank” Morris, 55, for orchestrating the kickback scheme by exploiting work he did to advance former New York Comptroller Alan Hevesi’s political career; former deputy comptroller David Loglisci, 39, for facilitating and benefiting from the plot; former state Liberal Party chairman Raymond Harding, 74, for pocketing illicit payments; and Saul Meyer, 38, a Dallas money manager for Aldus Equity Partners, for a paying kickbacks.

The defendants deny wrongdoing and face SEC civil actions, too. In all, about $5 billion of the New York state pension fund’s $9.5 billion in alternative investments made in the period 2003-2007 were tainted by kickbacks, the SEC said.

Limited Success

Carlyle had “limited success” in obtaining investments in the New York pension fund until it retained Morris in 2003, Cuomo said. Afterwards, Carlyle got about $730 million in total investment commitments from the state fund in Carlyle and Carlyle/Riverstone Funds, according to Cuomo’s statement. New York-based Riverstone Holdings LLC is a joint venture partner of Carlyle. Cuomo said after the press conference he is also investigating Riverstone. Riverstone declined to comment.

Cuomo said that in exchange for the investment commitments, Carlyle paid nearly $13 million to Searle & Co., the broker- dealer Morris was associated with, and Searle paid most of the placement fees to PB Placement, LLC, a shell company of Morris’s. Though Carlyle didn’t know it, Cuomo said, Morris split the fees with Barrett Wissman, 46, a Dallas fund manager accused of paying and receiving kickbacks.

The attorney general said on April 15 that he had secured a guilty plea from Wissman.

Members of the Washington-based Carlyle Group, including co-founder Rubenstein, donated at least $118,000 to Hevesi, according to New York campaign finance records. Carlyle was paid $13.5 million in fees by the New York state pension fund for the year ending March 31, 2008, according to the pension fund’s annual report.

Era of Transparency

“We have reached a successful resolution with the Attorney General and strongly support his efforts to implement reforms that usher in a new era of transparency and accountability into the pension fund investment process,” Carlyle said in a statement.

The regulators’ indictments and civil complaints depict officials allowing political and personal ties and financial self-interest to trump merit when deciding who will be entrusted to invest taxpayer money.

Institutions targeted by placement agents go beyond public pension funds, which held assets valued at $2.23 trillion at the end of 2008, according to the U.S. Census Bureau. They also seek money from corporate pension plans, investment companies, insurers, banks, foundations and private and public endowments. U.S. institutions controlled $27.1 trillion in assets at the end of 2006, up 11 percent from 2005, according to the New York- based Conference Board’s latest annual tally, released in September.

Guilty Plea

Cuomo said on May 12 that Julio Ramirez Jr., 48, a Los Angeles placement agent who allegedly solicited and shared in illicit payments, also had pleaded guilty.

Aldus Equity Partners also has been sued by current New York Comptroller Thomas DiNapoli for unspecific investment losses, fired by the Los Angeles pension fund, New Mexico and Connecticut and suspended by the Louisiana State Employees Retirement System.

The president and a fellow member of the board that oversees the Los Angeles fund, Sean Harrigan and Elliott Broidy, quit after the SEC questioned them about connections to Aldus and other firms under scrutiny in the New York case. “I have always conducted myself properly,” Broidy said in an e-mail after quitting May 7. Harrigan told the board that he did “absolutely nothing wrong.”

Support for Probe

Cuomo has tried to enlist support for his probe from other states. He briefed representatives of 36 attorneys general on a May 1 conference call and said they had decided to form a multi- state task force to share information, prosecute wrongdoing and facilitate reform.

The attorney general said May 1 he is widening his probe to include middlemen who weren’t properly registered or licensed. Ellen Nachtigall Biben, Cuomo’s top public corruption prosecutor, said the office would issue more than 100 subpoenas to investment firms and their agents.

Barack Obama’s administration also has been drawn into the controversy: Steven Rattner, head of the president’s auto industry rescue efforts since February, headed New York-based Quadrangle Group LLC when the private-equity firm paid Morris about $1.1 million in finder fees for a $100 million investment from New York’s pension fund. Adam Miller, a spokesman for Rattner and Quadrangle, declined to comment; neither has been charged.

Asked whether there was any deal in the works with Quadrangle, Cuomo said, “None that we can speak of today. Otherwise we would be speaking of Quadrangle.”

New Mexico

Morris’s employer also was paid $150,000 by Carlyle Group after New Mexico agreed to invest $20 million in the Washington- based private-equity firm known for its political ties. Established in 1987, its board has included former President George H.W. Bush, former Defense Secretary Frank Carlucci, former Secretary of State James A. Baker and former British Prime Minister John Major.

U.S. prosecutors have subpoenaed New Mexico’s $11.8 billion state endowment funds for documents regarding investment activities, according to a state spokesman.

The New Mexico Investment Council, which includes Governor Bill Richardson, received the request earlier this month, spokesman Charles Wollman said today in a telephone interview. He declined to describe the contents of the subpoena, issued by the U.S. Attorney in Albuquerque.

“We’re working to comply with the request of the authorities,” Wollman said. “We’ll be cooperating fully.”

For Related News and Information: Top funds stories: TOP FUND <GO> Regulatory information: NI REGPROBE <GO> Top legal stories: TLAW <GO> Bloomberg legal resources: BLAW <GO> Quadrangle Group stories: 20579Z US <Equity> CN <GO>

Last Updated: May 14, 2009 17:25 EDT