As Felix Salmon notes (from Mark Gimein’s story on Paradigm over at the Big Money) when James and Hunter Biden, the brother and son of the US vice president first got into the hedge fund industry in 2006, they did so for some pretty good monetary reasons:
An “Engagement Agreement” signed by Lotito, Jim Biden, and LBB Holdings, the partnership set up by the two Bidens and Lotito to buy Paradigm… promises James Biden and Lotito a “Placement Fee” of 10 percent of any money invested by clients they brought in.
(Lotito is the individual who introduced the Bidens to Paradigm.)
Those are, as Felix rightly observes, big placement fees.
In the event, those placement fees were never paid to James or Lotito – the LBB partnership that had been set up to buy the fund fell apart. The Bidens later alleged that this was because of the discovery by them of some of Lotito’s less savoury connections (the attorney Lotito had recommended – with whom he had close links – turned out to be a fraudster and Lotito himself was the subject of numerous court cases).
The Bidens went on to buy Paradigm alone.
But, says Felix, the LBB plan that never was is interesting all the same since:
…it gives you an idea of (a) how profitable hedge-fund investments are, for funds-of-funds; and (b) how big the incentives are for middlemen to go out and sell hedge funds to big investors.
In fact, as a court complaint later lodged by Lotito against the Biden’s alleges (he sued in 2006 after the Bidens backed out of the LBB arrangement above) the really interesting point about the Biden’s foray – particularly in light of the recent brouhaha over placement agents and pension funds - isn’t just the sums involved (emphasis ours):26. The prospect of acquiring Paradigm excited Lotito for several reasons. Although the hedge funds managed by Paradigm already had significant assets under management, Lotito believed that the company could quickly expand its network of investors, particularly among public employee pension funds in the Taft-Hartley marketplace…
(29) It was agreed that Lotito and James Biden would be seperately retained by PCL to seek out pension funds and others who might be interested in investing.
The Taft-Hartley market place being public sector pension funds – with whom Democratic politicians often have very strong ties.
Indeed, the Bidens’ contacts with Lotito in the first place had been facilitated through a former director of one such Taft-Hartley fund, the extremely well connected, Thomas Scotto.
The whole Biden/Paradigm affair also links back to the murky – though largely legitimate – world of pension fund placement agents so much in the news of late.
In this case, it shows how people as politically well-connected as James and Hunter Biden might once have hoped to use their political knowledge to great effect in the hedge fund business.
Indeed, it’s all rather similar to this Bloomberg story out Monday on Eileen Kotecki – a Democrat fundraiser who moved into raising money for hedge funds:
Taking advantage of political work for private gain isn’t illegal. Yet Kotecki’s career shift from former Vice President Al Gore’s chief fundraiser into the placement-agent business illustrates how it has become the province of the well- connected, including campaign operatives, out-of-office politicians, former public pension officials and even a Pro Football Hall of Fame wide receiver.
FT Alphaville has dug out the below – a list of existing clients that might be targeted to invest in Paradigm, compiled by the Bidens and Lotito before their LBB partnership fell apart:
