"I think you perhaps don't understand finance."

It is Monday afternoon, and Bob Grady - the national Republican power-broker behind Chris Christie's prospective presidential campaign - is angrily lecturing me on the murky world of investments. As one of Christie's closest advisers and as the governor's hand-picked chairman of the New Jersey Investment Council, Grady is specifically lecturing me about a decision by the council to hand $300 million of state pension money to private equity firm the Carlyle Group.

As I explained to him, I was calling about the deal because a Pando investigation has found that Grady also happens to be a former longtime executive at Carlyle whose financial disclosure forms (embedded below) show he still receives income from Carlyle investments, still owns a stake in Carlyle Group entities and now works at another fund that has investments with - you guessed it - Carlyle.

During our call, Grady insisted that he officially recused himself from involvement in the November Carlyle transaction -- something which would typically signal a clear conflict of interest. He then insisted that the New Jersey investment is in "a new fund and there's no overlap" with his own holdings. Further he insisted that it was "impossible" for his own holdings to preference him in any way that could allow him to benefit from New Jersey's $300m deal with Carlyle.

In fact, as the results of our investigation -- detailed in full below -- show, it is far from "impossible" for Grady to benefit from the deal, as even the Carlyle Group admits. Also, while Grady is telling the truth about having recused himself from negotiations, that single act of transparency (which, as experts explain below, is largely symbolic) stands in stark contrast to the otherwise total secrecy surrounding the transaction.

In response to Pando requests, both the New Jersey Treasury Department and Carlyle have refused to release the terms of the pension fund agreement. Grady too declined to share with Pando the text of his own partnership agreements with Carlyle, saying: "Carlyle does not release its partnership agreements with employees and does not allow its employees or partners to do so."

But for all of Grady and the state of New Jersey's attempts to keep details of their financial dealings from the public, there's plenty we now know about the connection between Grady, New Jersey state government, Carlyle and a few hundred million bucks of public money. It is a microcosmic story of the shadowy politics of public pensions - the kind of tale of power, influence and secrecy that is playing out in states across the country.

Christie Mentor’s Stake in Carlyle

Robert E. Grady has been described in the media as a longtime “national GOP force”. He has already served in one Republican White House (George H. W. Bush’s) and is now, according to the Asbury Park Press, one of the key players behind Christie’s likely presidential run. That’s not surprising. As The Nation magazine previously reported, Grady has been a mentor to Christie since the governor was a teenager, and the Newark Star-Ledger notes that Grady is now “one of Christie’s closest advisers.” He is also a big financial contributor to Christie and was subsequently named head of the powerful pension council by Christie in 2010.

Before that appointment, Grady made his money as a managing director and nine-year member of the Management Committee at the Carlyle Group. During that time, he came to have an ownership stake in Carlyle entities - a fact which is reflected in his aforementioned state disclosure forms.

In 2010, those forms documented Grady’s ownership in the Carlyle Global Partners Master Coinvestment Fund; In 2011, Grady listed TCG Holdings, L.P., TCG Holdings II, L.P. and “entities related to the Carlyle Group.” In 2012, he listed an ownership stake in “The Carlyle Group and related entities.” And in 2013, he listed "Carlyle Global Partner Coinvestment Fund, LP." On all the forms, he lists Carlyle entities as "producing or expected to produce income" for him. Additionally, since 2009, Grady has been a managing director at Cheyenne Capital Fund, which, according to disclosures by the Wyoming Treasurer’s Office, also has had an investment stake in Carlyle.

All of that provides context for what happened in the weeks after Christie won his second term.

On November 15th, the acting director of New Jersey's Director of Investments published a letter on the state's website about the proposed $300 million deal. Less than a week later, Grady's investment council ratified it, despite growing criticism of such high-fee “alternative investments” in general, and despite specific high-profile criticism of Carlyle’s fees by Oxford University investment officials. In all, the deal more than doubled the pension fund's total investment in Carlyle from $175 million to $475 million, making the collective investments in Grady's old firm one of the largest alternative investments in New Jersey's entire portfolio.

According to the minutes of the meeting in which the state investment council ratified the deal, Grady did indeed recuse himself from the debate over Carlyle deal. He also told Pando "(I) did not attend, vote in connection with, or participate in any discussion" about the deal.

Yet, as one private equity executive who works with public pensions told Pando, with Grady the chair of the council and a longtime Carlyle icon, his connections to the firm in question were likely well known by the rest of the board.

“In an investment category where, for the managers, there are massive potential conflicts of interest lurking nearly everywhere, simply recusing yourself from time to time is not nearly enough, because everybody on the investment board already knows the relationships at play," said the executive.

Carlyle contradicts Grady about separation of pension fund money

Grady insisted to Pando that it not possible for New Jersey's recent investment in the new Carlyle fund to affect or bolster his personal holdings in other, older Carlyle funds because they "are completely separate partnerships (and) completely different legal entities." However, in an interview with Pando, a Carlyle Group spokesperson directly contradicted Grady's claim, saying that while transactions between Carlyle funds are arduous, they are, in fact, entirely possible. In fact, according to the senior private equity executive I spoke with, such transactions "happen all the time" between different private equity funds run by the same management firm - and they happen very often at the expense of the public pension plan investors.

That latter view was confirmed by former SEC investigator Ted Siedle who said such overlap means recusal provides little protection because it alone does not protect taxpayers and retirees from self-dealing.

“Recusal is meaningless in the context of private equity investments like this,” Siedle told Pando. “Private equity deals often treat different investors differently so that one investor may receive compensation and fees from the funds invested by another investor. In this case, it is possible that the fees New Jersey’s pension fund is paying to one Carlyle fund may be able to be credited to another investor in his own Carlyle holdings.”

In a recent report evaluating such arrangements' impact on Rhode Island taxpayers, Siedle documented how the secret terms of alternative investment agreements can preference politically connected "mystery investors" to "profit at (pension funds') expense—effectively granting a license to steal from the state pension to these unknown investors."

“The contracts that pension funds sign with private equity firms and hedge funds often say certain investors who are strategic - like, former firm partners - can be designated ‘strategic investors’ and given preference,” Siedle told Pando. “So if you you have strategic investment status with a firm that gets New Jersey public pension money, and the New Jersey pension fund doesn't have the same investor status, you may end up getting to pocket some of that public pension money as fees or income.”

Where pensions and campaign cash meet

In his position overseeing one of the nation’s largest pension funds, Grady is not only in a position that could be beneficial to his own ongoing personal investments. He is also in a prime spot to help leverage pension contracts for Christie campaign donations.

Already, The Nation’s Lee Fang has documented how two firms who made financial contributions to a Republican group helping Christie’s campaign were rewarded by Grady’s board with lucrative pension management contracts.

The Carlyle deal could offer a similar upside to Christie’s 2016 presidential campaign, as Carlyle is a major spender on national politics. In 2012, for example, Carlyle employees donated more than $518,000 to Mitt Romney and the Republican National Committee, according to the Center for Responsive Politics.

While there is no evidence of a direct quid pro quo in New Jersey's deal, Carlyle is no stranger to the intersection of pension contracts, campaign contributions and political power.

In 2005, for example, federal prosecutors subpoenaed documents related to Carlyle paying a prominent Republican powerbroker $5 million to secure a pension deal in Illinois. A mere four years later, the company agreed to pay $20 million to settle a government investigation into a kickback scandal involving the New York State pension fund. A USA Today investigation that same year showed that "Carlyle executives or employees also gave at least $114,375 to 18 pension fund officials or office seekers in 10 states since 1998."

* * * *

Toward the end of my call with Grady, I pushed him to explain why the Christie Administration will not release the text of New Jersey's partnership agreement with Carlyle. Don't taxpayers - and, in particular pensioners - have a right to see the terms of the agreements being made in their name and with their money? And wouldn't transparency clear up questions about potentially huge conflicts of interest and self dealing?

Before saying he did not want to comment further, he declared that such secrecy is "industry standard." Which, of course, is exactly why the questions need to keep being asked - whether or not those like Grady want them answered.

Grady's disclosure documents:

2011

2012

2013

Cc f Disclosure 050911

[illustration by Brad Jonas for Pando]