4th UPDATE:Quadrangle Settles With NY AG, SEC On 'Pay To Play'

Private-equity firm Quadrangle Group LLC has settled with New York Attorney General Andrew Cuomo's office and the U.S. Securities and Exchange Commission in the "pay-to-play" investigation involving New York's largest pension fund.

In the agreement with Cuomo's office, Quadrangle agreed to pay $7 million to the state and to fully cooperate with the government's ongoing investigations, Cuomo said.

Earlier Thursday, the SEC sued the private-equity company for its involvement in the scandal at the New York State Common Retirement Fund, New York's largest pension fund. Quadrangle said in a statement that it has also settled with the SEC.

The private-equity group said that both investigations related "solely to the actions of former Quadrangle employees." Quadrangle neither admitted nor denied any allegations.

The statement from Cuomo's office said Quadrangle, as well as GKM Newport Generation Capital Services LLC, paid Henry "Hank" Morris, then-Comptroller Alan Hevesi's paid political adviser, to arrange investments from the pension fund.

Quadrangle retained Morris as a placement agent to increase from $25 million to $100 million an investment Quadrangle was seeking from the fund, the release said.

"We wholly disavow the conduct engaged in by Steve Rattner, who hired the New York State Comptroller's political consultant, Hank Morris, to arrange an investment from the New York State Common Retirement Fund," Quadrangle was quoted as saying in Cuomo's release. "That conduct was inappropriate, wrong, and unethical."

Rattner, who co-founded Quadrangle but who is no longer affiliated with it, has been implicated by Quadrangle's involvement. A high-profile Wall Street figure tapped by President Barack Obama as the so-called automotive czar, Rattner was accused of meeting with a consultant about paying a finder's fee for pension cash.

Jamie S. Gorelick, counsel for Rattner, said in an emailed statement that Rattner, who left the government post last year, disagreed with Quadrangle's comments.

"Rattner does not agree with the characterization of events released today, including those contained in Quadrangle's statement," the statement read. "Rattner shares with the New York Attorney General the goal of eliminating public pension fund practices that are not in the public interest. He looks forward to the full resolution of this matter."

Cuomo's office said Quadrangle agreed to fully cooperate in its investigation of Rattner.

Under the agreement with Cuomo's office, Quadrangle will pay $7 million, $5 million of which will be returned to the pension fund and $2 million of which will go to the state treasury. Those payments don't include any potential fines related to the Rattner probe, Cuomo said.

The SEC lawsuit, filed in U.S. District Court in Manhattan, alleged that a Quadrangle fund secured a $100 million investment with the fund only after a former executive arranged to distribute the DVD of a low-budget film produced by a state official and his brothers and paid more than $1 million in sham "finder" fees to a one-time top political adviser to former Comptroller Hevesi.

The SEC said it couldn't comment on whether Rattner himself was under investigation by the commission, only saying its investigations into the entire matter are continuing.

Quadrangle said in its own release that it supports the efforts of the New York Attorney General and the SEC to ensure that the fund-manager selection process is based solely on merit. In 2009, Quadrangle implemented revised compliance policies that were consistent with the Code of Conduct and best practice in the industry.

Cuomo's office also reached agreements on another about $5 million in payments from three other firms and one individual.

Ted Poretz, a lawyer for GKM Newport, said his client "is delighted to put this behind them."

In total, the long-term investigation has now led to six guilty pleas with the government recovering $130 million, Cuomo said during a conference call with reporters.

"If you follow the money in the state of New York, it will lead you to the state pension fund," Cuomo said. "Just because it's gone on a long time doesn't make it okay...It's the same corruption for decades."

Current state Comptroller Thomas P. DiNapoli said in a statement that he was "outraged" by the acts revealed and was working to clear up the "mess" he inherited.

"I have thoroughly and methodically evaluated and reformed the operations and investment policies of the Pension Fund," DiNapoli said, adding that questions as to whether his administration were under investigation were wrong. "I have managed the Office of the State Comptroller and the New York State Common Retirement Fund with transparency and integrity from the start of my tenure. Any suggestion or innuendo to the contrary is baseless."

Cuomo is actively pushing New York to pass reform of the pension industry, which he argued Thursday would prevent similar cases in the future. He has also pushed other attorneys general to expand their own investigations into pension funds.

"I feel this is going to be a serious problem for the nation," Cuomo said Thursday.

-By David Benoit, Dow Jones Newswires; 212-416-2458; david.benoit@dowjones.com

(Chad Bray contributed to this article.)

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