New York State attorney general, Andrew Cuomo, has launched a war against corruption in US public pension funds. The first casualty is placement agents - middlemen who market private equity and hedge funds. After Cuomo's inquiry on ‘play-to-play' schemes broadened from New York to 35 other states, several pension funds decided to ban paid intermediaries in their investments, including the New York State Common Retirement Fund (CRF), The New York City Employee' Retirement System, the State of Connecticut Retirement & Trust Funds and the Los Angeles City Employees' Retirement System.  Others are waiting until the New York investigation is complete, while CalPERS, the country's largest pension fund, has proposed a policy that would require the disclosure of placement agents' fees.

At the centre of Cuomo's investigation are political and governmental aides to New York State's former comptroller, Alan Hevesi, the trustee of its pension fund, who left office in December 2006 in a cloud of scandal. According to Cuomo's indictment, Hevesi's top political adviser Hank Morris and Hevesi's deputy comptroller and chief investment officer David Loglisci gave investment firms billions of dollars of state pension money in exchange for kickbacks and other payments for personal and political gain. Both have denied wrongdoing.

Morris was the placement agent who obtained a $175m investment from the New York state fund into Saul Meyer's Aldus Equity Partners, in exchange for $300,000. "Aldus was chosen by the pension plan because of his willingness to illegally line the pockets of others," said James Clarkson, acting director of the Securities and Exchange Commission (SEC), which filed civil charges against Meyer and Aldus.

Another case connects New York to California: a Sacramento lobbyist Darius Anderson helped the California real estate mogul Terry Fancher get a $150m (€110m) investment from Hevesi's fund into his Stockbridge Capital Partners. Meanwhile, Anderson and Fancher contribute $75,100 to Hevesi's re-election campaign in 2005-06. During the same period Anderson helped Fancher get hundreds of millions from CalPERS. Now Anderson's San Francisco-based placement firm, Gold Bridge Capital, is one of 100 investment firms and their placement agents subpoenaed by Cuomo.

The placement agents' business is a legitimate one: they offer private equity firms and hedge funds services ranging from designing marketing materials to making introductions that help them win contracts with pension funds and other large investors. More than half of all private-equity firms globally used placement agents to close funds last year, according to London-based research firm Preqin. Agents are paid with fees by the firms that hired them, usually 1-2% of the assets they help get invested. They must also be registered with regulators.

Several funds believe that placement agents are not the problem. "There's a legitimate place for placement agents," said Michael Travaglini, executive director at the Massachusetts Pension Reserves Investment Management Board (Mass PRIM). The problems, he thinks, are corporate governance, fee disclosure and the rules about political contributions.

The New York state's fund has only one trustee, the comptroller, while, for example, Washington State Investment Board has 15 fiduciaries on the board. Pennsylvania Public School Employees' Retirement System closely monitors fees and if limited partnerships are billed by the fund for placement fees, the pension system requires a full dollar-for-dollar credit against management fees, said its spokeswoman Evelyn Tatkovski. The state investment committee of New Jersey Division of Investment bars political contributions above $250 for either managers or placement agents, says spokesman Tom Vincz.

Mass PRIM's trustees, as well as all state employees, are not allowed to accept more than $50 worth of gifts from outside entities during a single calendar year. It is important to monitor a pension fund's manager selection process, says to Travaglini. Mass PRIM's investment committee operates separately from its search committee when working on investment manager searches, and requires firms seeking commitments to disclose any third-party marketing relationships used in connection with the pension fund's commitment; and once a year KPMG conducts an audit of its investment manager selection process.