Quadrangle Group's Steve Rattner Charged in Pay To Play Scheme

The Securities and Exchange Commission earlier this month charged former Quadrangle Group principal Steven Rattner with participating in a widespread kickback scheme to obtain investments from New York’s largest pension fund.

The SEC alleges that Rattner secured investments for Quadrangle from the New York State Common Retirement Fund after he arranged for a firm affiliate to distribute the DVD of a low-budget film produced by the Retirement Fund’s chief investment officer and his brothers. Rattner then caused Quadrangle to retain Henry Morris – the top political advisor and chief fundraiser for former New York State Comptroller Alan Hevesi – as a “placement agent” and pay him more than $1 million in sham fees even though Rattner was already dealing directly with then-New York State Deputy Comptroller David Loglisci and did not need an introduction to the Retirement Fund.

The SEC alleges that after receiving pressure from Morris, Rattner also arranged a $50,000 contribution to Hevesi’s re-election campaign. Just a month later, Loglisci increased the Retirement Fund’s investment with Quadrangle from $100 million to $150 million. As a result of the $150 million investment with Quadrangle, the Retirement Fund paid management fees to a Quadrangle subsidiary. By virtue of his partnership interest in Quadrangle and its affiliates, Rattner’s personal share of these fees totals approximately $3 million.

Rattner agreed to settle the SEC’s charges by paying $6.2 million and consenting to a bar from associating with any investment adviser or broker-dealer for at least two years.

“New York State retirees deserve investment advisers that are selected through a transparent, conflict-free process, not through payoffs, undisclosed financial arrangements and movie distribution deals,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. David Rosenfeld, Associate Director of the SEC’s New York Regional Office, added, “Rattner delivered special favors and conducted sham transactions that corrupted the Retirement Fund’s investment process. The assets of New York State workers were invested for the hidden purpose of enriching Morris and Loglisci’s brother.”

The SEC previously charged Morris and Loglisci for orchestrating the fraudulent scheme that extracted kickbacks from investment management firms seeking to manage the assets of the Retirement Fund. The SEC charged Quadrangle earlier this year.

According to the SEC’s complaint against Rattner filed in U.S. District Court for the Southern District of New York, Morris informed Rattner in the fall of 2003 that Loglisci’s brother was involved in producing a film called “Chooch.” Morris suggested that Rattner help Loglisci’s brother with the theatrical distribution of the film. Rattner met with Loglisci’s brother and agreed to assist him, but Rattner’s efforts did not lead to a distribution deal. Approximately one year later, Loglisci’s brother contacted Rattner about DVD distribution of “Chooch.” Within days of speaking to Loglisci’s brother, Rattner contacted Loglisci about investing in a new Quadrangle private equity fund being marketed by the firm. Rattner told Loglisci that he had arranged a meeting between Loglisci’s brother and a Quadrangle affiliate — GT Brands — to discuss a possible DVD distribution deal.

The SEC alleges that after Loglisci’s brother met with GT Brands and telephoned Rattner to complain about the treatment he had received from GT Brands, Rattner warned a GT Brands executive to treat Loglisci’s brother “carefully” because Quadrangle was trying to obtain an investment through Loglisci. After GT Brands made clear to Rattner that it was not interested in distributing the film, Rattner instructed the GT Brands executive to “dance along” with Loglisci’s brother. According to an e-mail, Rattner telephoned Morris to inquire whether “GT needs to distribute [the Chooch] video” in order to secure an investment from the Retirement Fund. Morris offered to “nose around” to determine how important the DVD distribution deal was to Loglisci. GT Brands ultimately reversed course and offered to manufacture and distribute the DVD at a discount from its standard fee. Rattner approved the proposed terms of the distribution deal.

The SEC’s complaint alleges that in late October 2004, after Rattner and others from Quadrangle had already met with Loglisci and the Retirement Fund’s private equity consultant and received encouraging feedback from both of them, Morris met with Rattner and offered his placement agent services to Quadrangle. Morris warned Rattner that Quadrangle’s negotiations with the Retirement Fund could always fall apart. Although Quadrangle was already working with a placement agent, Quadrangle agreed to pay Morris as well.

According to the SEC’s complaint, soon after Quadrangle retained Morris as a placement agent and Rattner had advised Morris that GT Brands was moving forward with the deal to distribute the Chooch DVD, Loglisci personally informed Rattner that the Retirement Fund would be making a $100 million investment in the Quadrangle fund.

The SEC alleges that Morris later contacted Rattner and pressed him for a financial contribution to Hevesi’s re-election campaign. Although Rattner purportedly had a personal policy that he would not make political contributions to politicians who have influence over public pension funds, Rattner agreed to find someone else to make the contribution. After speaking with Morris, Rattner asked a friend and the friend’s wife to each contribute $25,000 to Hevesi’s campaign. The day after these contributions were communicated to Hevesi’s campaign staff, Hevesi telephoned Rattner and left him a message thanking him for the contribution. In late May 2006, Rattner’s friend transmitted the promised campaign contributions to Rattner, who forwarded the two checks to Hevesi’s campaign. Approximately one month later, Loglisci committed the Retirement Fund to an additional $50 million investment in the Quadrangle fund.
In settling the SEC’s charges without admitting or denying the allegations, Rattner consented to the entry of a judgment that permanently enjoins him from violating Section 17(a)(2) of the Securities Act of 1933 and orders him to pay approximately $3.2 million in disgorgement and a $3 million penalty. The settlement is subject to court approval. Rattner also consented to the entry of a Commission order that will bar him from associating with any investment adviser or broker-dealer with the right to reapply after two years.

The SEC’s investigation was conducted by Joseph Sansone and Maureen Lewis of the New York Regional Office. The investigation is continuing.

SEC Foils Diamond Trading Ponzi Scheme

The Securities and Exchange Commission has obtained an emergency court order freezing the assets of a Colorado man and his company charged with running a Ponzi scheme with money invested for diamond trading.

The SEC alleges that Richard Dalton and Universal Consulting Resources LLC (UCR) raised approximately $17 million from investors in 13 states for two fraudulent offerings that were generally referred to as the “Trading Program” and the “Diamond Program.” Investors in both programs received monthly payments which Dalton told them were profits from successful trading. However, there is no evidence to substantiate the $10 million in claimed profits from the two programs, and the vast majority of funds that came into UCR bank accounts were from new investors instead of actual profit-generating activity. Dalton used money from new investors to fund the monthly payments to existing investors while continuing to recruit new investors in order to keep his scheme going. Meanwhile, Dalton stole investor funds to purchase a home and a vehicle and pay for his daughter’s wedding reception.

Investors often learned of Dalton through a friend or family member who had previously invested with him. These new investors placed great weight on the fact that someone they knew and trusted received regular monthly payments from Dalton. Some investors even invested funds from their self-directed IRA retirement accounts.

“Dalton made his Ponzi scheme falsely appear profitable by continuing to bring in new investor money,” said Donald Hoerl, Director of the SEC’s Denver Regional Office. “Investors should be skeptical when someone promises low risk and high guaranteed returns, and focus on the details of the investment being offered rather than the lure of profits paid to friends and family.”

According to the SEC’s complaint filed in U.S. District Court in Denver, Dalton told investors in UCR’s Trading Program that their money would be held safely in an escrow account at a bank in the United States, and that a European trader would use the value of that account — but not the actual funds — to obtain leveraged funds to purchase and sell bank notes. According to Dalton, the trading was profitable enough that he was able to guarantee returns of 4 to 5 percent per month — or 48 to 60 percent per year — to investors. Dalton claimed that he had successfully run the Trading Program for nine years.

According to the SEC’s complaint, UCR began offering the Diamond Program in early 2009. Dalton claimed the program would profit by using investor funds for diamond trading. Similar to the Trading Program, Dalton claimed that investor funds would be safely held in an escrow account. Under the Diamond program, Dalton enticed investors with a guaranteed 10 percent monthly return — or 120 percent annual return.

The SEC further alleges that Dalton, who had no other employment or legitimate source of income, funded his personal life at the expense of investors. Dalton spent or withdrew in excess of $250,000 from UCR accounts that held investor money and used those funds for personal expenses, including paying $5,000 for his daughter’s wedding reception and $38,000 to purchase a vehicle. Dalton also transferred more than $900,000 from another UCR account in order to purchase a home. The home was purchased solely in the name of his wife, Marie Dalton, in an attempt to protect it from creditors. The asset freeze obtained by the SEC extends to the assets of Dalton’s wife, who is named as a relief defendant.

The SEC’s complaint alleges that Dalton and UCR violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a)(1) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint names Marie Dalton as a relief defendant in the case in order to recover investor assets now in her possession.

Kerry Matticks, John Mulhern and Jay Scoggins of the SEC’s Denver Regional Office conducted the investigation.

The Honorable Robert E. Blackburn in the U.S. District Court in Denver granted the SEC's request late yesterday for an asset freeze against Richard Dalton, Marie Dalton and UCR and a temporary restraining order and other remedies against Richard Dalton and UCR. In addition to the emergency relief for investors, the SEC seeks permanent injunctions, disgorgement plus pre-judgment interest, and financial penalties against all of the defendants.
The SEC’s investigation is ongoing.

Former San Diego Officials Agree to Pay Financial Penalties in Municipal Bond Fraud Case

The Securities and Exchange Commission today announced that four former San Diego officials have agreed to pay financial penalties for their roles in misleading investors in municipal bonds about the city's fiscal problems related to its pension and retiree health care obligations. It's the first time that the SEC has secured financial penalties against city officials in a municipal bond fraud case.

The SEC settlement with the four former city officials requires the approval of U.S. District Judge Dana M. Sabraw in the Southern District of California. The SEC filed charges in April 2008 against former San Diego City Manager Michael Uberuaga, former Auditor & Comptroller Edward Ryan, former Deputy City Manager for Finance Patricia Frazier, and former City Treasurer Mary Vattimo. The SEC alleged that the officials knew the city had been intentionally under-funding its pension obligations so that it could increase pension benefits but defer the costs. They also were aware that the city would face severe difficulty funding its future pension and retiree health care obligations unless new revenues were obtained, benefits were reduced, or city services were cut. However, despite this extensive knowledge, they failed to inform municipal investors about the severe funding problems in 2002 and 2003 bond disclosure documents.

"Municipal officials have a personal obligation to ensure that investors are provided with complete and accurate information about the issuer's financial condition," said Rosalind Tyson, Director of the SEC's Los Angeles Regional Office. "These former San Diego officials are paying a price for their actions that jeopardized the interests of investors and put the city's current and future retirees at risk."

The four former officials agreed to settle the SEC's charges without admitting or denying the allegations and consented to the entry of final judgments that permanently enjoin them from future violations of Securities Act of 1933 Section 17(a)(2). Under the settlement terms, Uberuaga, Ryan, and Frazier each pay a penalty of $25,000 and Vattimo pays a penalty of $5,000.

The SEC's charges against a fifth former city official — Assistant Auditor & Comptroller Teresa Webster — are still pending.

The SEC litigation was handled by John M. McCoy III, David J. Van Havermaat, and Catherine W. Brilliant.

Healtchare Finance Exec. On The Run For $2.8b Fraud Scheme Arrested In Mexico

Former National Century Financial Enterprises (NCFE) executive Rebecca S. Parrett, 62, has been arrested in Mexico, announced Assistant Attorney General Lanny A. Breuer of the Criminal Division, U.S. Attorney Carter M. Stewart for the Southern District of Ohio and U.S. Marshal Cathy Jones for the Southern District of Ohio. Parrett fled in March 2008 after a federal jury convicted her on charges stemming from her role in a $2.8 billion fraud that led to NCFE’s collapse.

Mexican authorities arrested Parrett in Ajijic, Jalisco, Mexico, based on information provided to them by the U.S. Marshals Service in Columbus, Ohio. Parrett was immediately deported according to Mexican immigration laws. Mexican authorities escorted Parrett to Los Angeles where deputy U.S. Marshals arrested her on the warrant issued after her conviction. Parrett will appear before a federal judge in U.S. District Court in Los Angeles today, then will be returned to Columbus.

"Corporate executives found guilty for their fraudulent activity will not be allowed to escape justice by fleeing the United States," said Assistant Attorney General Lanny A. Breuer. "Like any defendant convicted by a jury, Ms. Parrett is today facing the consequences of her actions."
"The U.S. Marshals Service has followed all leads and devoted countless hours to the search for Parrett," said U.S. Attorney Stewart. "Their persistence has led to her arrest. Now she will finally face justice."


"The U.S. Marshal Service never wavered or slowed in our commitment to bring Rebecca Parrett to justice," said U.S. Marshal Cathy Jones. "Even fugitives with great financial resources willing to flee the country for years, as she did, will always have to look over their shoulder. The U.S. Marshals Service is world-renowned for having the resources to conduct complicated fugitive investigations, and this arrest again displays our commitment to ensuring the integrity of the criminal justice system."

A jury convicted Parrett, the former vice chairman, secretary, treasurer, director and owner of NCFE, on March 13, 2008, of charges including conspiracy, securities fraud and wire fraud. Parrett fled after the conviction. She was sentenced on March 27, 2009, to 25 years in prison. She was also ordered to forfeit $1.7 billion in property representing the proceeds of the conspiracy and to pay restitution of $2.3 billion, jointly and severally with other defendants. NCFE, formerly based in Dublin, Ohio, was one of the largest healthcare finance companies in the United States until it filed for bankruptcy in November 2002.

Parrett and other NCFE executives engaged in a scheme from 1995 until the collapse of the company to deceive investors and rating agencies about the company’s financial health and how investors’ money would be used. The court noted that 275 healthcare providers filed bankruptcy in whole or in part because of NCFE’s collapse. Parrett and nine other executives were convicted or pleaded guilty in connection with the fraud that led to the company’s collapse.

The investigation into Parrett’s disappearance generated leads in more than a dozen U.S. states and several foreign countries. Many federal, state and local police agencies assisted the U.S. Marshals Service in Columbus with its pursuit of the fugitive.

The cooperative investigation that led to Parrett’s arrest included assistance from the Southern Ohio Fugitive Task Force (SOFAST); the U.S. Department of State, Diplomatic Security Service; the Internal Revenue Service - Criminal Investigation Division; the Columbus Division of Police; the FBI; the Grove City, Ohio, Police Department; the Ohio Bureau of Criminal Identification and Investigation; the Drug Enforcement Administration; the U.S. Immigration and Customs Enforcement; the Ohio Adult Parole Authority; and the U.S. Postal Inspection Service. Officials also expressed their gratitude to Mexican authorities for their significant assistance in this matter.