The pattern is all too familiar — a hard-charging New York attorney general, soon to be governor, launching a legal and public relations campaign aimed at ruining a respected business leader, never mind the facts or the law.
Eliot Spitzer, at least, met some public resistance in his "sheriff of Wall Street" battles against New York Stock exchange chief Richard Grasso and AIG chairman Maurice "Hank" Greenberg. This time around, though, free-market types and the state's business community have been mostly out of the public fight as Andrew Cuomo has pursued money manager Steven Rattner.
One can perhaps understand why. Mr. Rattner, a longtime Democratic Party fundraiser who served as the Obama administration's auto "czar," was once a powerful government official vested with arbitrary powers to trample the rights of Chrysler bondholders or non-union GM white-collar retirees. Now Mr. Rattner's own fortune and career are at the mercy of Mr. Cuomo, a powerful government official exercising arbitrary powers of his own.
It may seem less an injustice than a kind of poetic justice.
Even reaching that conclusion, though, requires taking a clear-eyed look at the facts of the case and getting past the narrative advanced by Mr. Cuomo and repeated in most press accounts. A related civil case brought by the federal Securities and Exchange Commission was settled last month without Mr. Rattner admitting or denying the allegations.
In two lawsuits, Mr. Cuomo has alleged Mr. Rattner committed civil fraud, harming the New York State employee pension fund by paying "kickbacks" to get an investment of $150 million in state money for a private equity fund he managed.
Mr. Cuomo says the "kickbacks" had three elements. First were "sham placement fees" Quadrangle group — Mr. Rattner's firm — paid to Henry "Hank" Morris, a political consultant to the state comptroller, Alan Hevesi, who was sole trustee of the pension fund. Second was a DVD distribution deal Mr. Rattner allegedly arranged for a movie, "Chooch," that was produced by the brother of a state pension fund official. Third were $50,000 in campaign contributions that were given to the Hevesi campaign in 2006 by a California businessman, Haim Saban, and his wife.
However sinister Mr. Cuomo makes this all sound, none of it amounts to Mr. Rattner doing anything wrong. The investment, far from harming the state pension fund, actually performed relatively well. From March 2005 to September 2009, the net internal rate of return for the Rattner-managed fund in which the state invested was +4.6%. That's a period for which the Dow Jones Industrial Average was down 8% and the S&P 500 was down 11%. Since then, the Quadrangle fund's returns have grown to about 7%.
As for the "kickbacks," Morris was a registered placement agent with a licensed broker-dealer, Searle, whose engagement was fully disclosed to the state. Such placement agents are widely used in the industry. Morris has since pleaded guilty to a felony, but Mr. Cuomo's case essentially hangs on the unproven charge that Mr. Rattner somehow knew Morris was a crook, a charge for which Mr. Cuomo has produced not a scintilla of evidence.
On the fundraising point, the efforts by outside money managers to raise campaign contributions for state treasurers and comptrollers are so widespread that if the entire industry were held to the legal standard Mr. Cuomo is seeking to impose retroactively on Mr. Rattner, there'd be hardly a money manager, or the spouse of one, left standing. This hasn't happened. For example, Christine Schwarzman, the wife of Blackstone Group CEO Steve Schwarzman, gave $20,000 to Hevesi's campaign without so much as a murmur from Mr. Cuomo. Carlyle Group's David Rubenstein gave $48,000 to Mr. Hevesi, with no action against him personally by Mr. Cuomo. The Sabans also gave $60,000 to the Hevesi campaign in 2002, long before the state investment in Mr. Rattner's fund became an issue, and they share with Hevesi an interest in Israel. Mr. Cuomo's claim that Mr. Rattner "obtained the contributions from others so that he would receive credit for contributing to Hevesi without his name appearing on public donor records" is odd, given that Mr. Rattner and his wife were both already on public donor records as contributors to Hevesi.
That leaves "Chooch." Far from a "kickback" to a state official, this was a business agreement between a company Mr. Rattner's firm controlled and one controlled by the brother of a state pension fund official. Far from the sweetheart deal it has been portrayed as by Mr. Cuomo and by the press, it was a deal in which Mr. Rattner's company covered its costs and even made money. In private-sector investment banking or most any other business, an introduction like this for a client's brother would be considered well within the normal range of relationship management. Mr. Cuomo's complaint makes much of the fact that the distribution fee Mr. Rattner's company charged the producer was 12% rather than the usual 15%, but that difference may have totaled a few thousand dollars at most for the investors in the movie, and it's a decision that documents indicate was made at the company level rather than by Mr. Rattner. Does the New York attorney general now want to get involved in setting fees in the DVD distribution business, with the penalty for getting the fee wrong by three percentage points being $26 million and a lifetime ban from the securities industry?
It's the memorandum of law arguing for that ban in which Mr. Cuomo goes most over the top. On not one, not two, not three, but four occasions, Mr. Rattner had answered questions posed by Mr. Cuomo's lawyers. At the fifth meeting, Mr. Rattner exercised his Fifth Amendment right under the Constitution. "He expressly declined to answer based on his exercise of his Fifth Amendment rights," Mr. Cuomo's memo says, "Rattner's refusal to answer sixty-eight material questions in a Martin Act inquiry constitutes prima facie proof that he has been engaged in the fraudulent practices set forth in the complaint." If exercising the Fifth Amendment to avoid a prosecutor's perjury trap is seen as "prima facie proof" of guilt, we may as well repeal the Fifth Amendment, because it's no longer worth the parchment on which it's written. (The Supreme Court case on which Mr. Cuomo relies for shredding the Fifth, Baxter v. Palmigiano, concerned a disciplinary proceeding of a prison inmate, and it carried an important dissent by Justices Brennan and Marshall.)
Mr. Cuomo has sought to wring a bigger financial settlement out of Mr. Rattner than out of the many other fund managers who also hired Morris. On a television news program, he described Mr. Rattner's actions as "the worst behavior we've seen." Really? Others have pleaded to felonies, and one money manager confessed to paying tens of thousands of dollars in rent and hospital bills for the girlfriend of a state employee.
The disparate treatment has given rise to quiet speculation that the attorney general is mad at Mr. Rattner and Mr. Rattner's wife for siding with Kerry Kennedy in the Kennedy-Cuomo divorce or that Mr. Cuomo is peeved that Mr. Rattner rebuffed all of Mr. Cuomo's efforts to solicit him and never gave a penny to his campaign, putting Mr. Cuomo in the rare position of being a high ranking Democrat in New York to whom Mr. Rattner had never contributed. Spokesmen for Mr. Cuomo did not respond to my questions about that, though Mr. Cuomo himself has dismissed as "laughable" the idea that his treatment of Mr. Rattner is politically motivated.
In the end, reform of the state pension system will be achieved not by scapegoating successful fund managers but by moving to a defined-contribution system in which individuals would select their own investments or money managers rather than relying on a single politician to do it for them.
More immediately, though, recent experience in New York provides a cautionary lesson. If thuggish behavior is not successfully challenged at the attorney general level and a bully with little regard for the rule of law gets into the governor's office — well, there's a real potential for things to go downhill, and there's no telling who will be the next target.
More FutureOfCapitalism.com coverage of Mr. Rattner, including a disclosure of various connections, is here.
