Attorney General Richard Blumenthal is questioning whether the partnership selected to manage and renovate Connecticut's highway rest stops was truthful in its successful bid to gain the 35-year contract.

Blumenthal said The Carlyle Group, the parent company of a key partner in the rest stop deal, may have known it was under investigation in New York state when company representatives told state officials it had not been investigated by a government agency in the preceding five years.

Blumenthal, who is seeking a U.S. Senate seat this year, asked the state Department of Transportation to "further investigate this matter to determine whether Carlyle's bid documents were responsive and whether Carlyle is a responsible contractor for the service plaza contract."

Friday, just two days after Blumenthal's letter was sent, the DOT announced it had already completed the review Blumenthal sought and stood by its decision to award the contract to the Carlyle subsidiary and its partners.

"Published reports indicate that the Carlyle Group may have been aware that it was being investigated by the New York State Attorney General's office as early as 2007. If the representations contained in published reports are true, they call into question the veracity of the bid responses supplied by Carlyle in December 2008," Blumenthal said in his April 28 letter to the DOT.

In those bid responses, Carlyle Infrastructure Partners answered, "No," when asked if the company or any of its partners had been the subject of a governmental investigation in the last five years.

Five months later, in May 2009, The Carlyle Group agreed to a $20 million settlement to end its involvement in a 2-year-old investigation by New York State Attorney General Andrew Cuomo into fees paid to "placement agents" by equity funds in exchange for investments from the state pension fund.

Carlyle agreed to adopt new ethical standards regarding placement agent fees and campaign contributions.

A spokesman for Carlyle said the partnership was truthful in answering Connecticut's questions.

"We appreciate the state's swift review and conclusive affirmation of the thorough due diligence it conducted during the procurement process. We take our disclosure obligations seriously and are pleased (DOT) has confirmed the veracity of our statements. We are excited to partner with Connecticut in the redevelopment and operation of the state's highway service plazas," Carlyle spokesman Chris Ullman said.

Ullman said Carlyle first learned it was under investigation by Cuomo in April 2009, four months after the bid was submitted to Connecticut.

Prior to April 2009, Ullman said, The Carlyle Group regarded itself as a "witness" in Cuomo's investigation.

"We asked if we were being investigated, and we were told no," Ullman said.

A spokesman for Cuomo would confirm only that, prior to December 2008, the Carlyle Group had been interviewed and had provided documents to investigators for the attorney general.

"Prior to December 2008, the (New York) AG's office sought and had received materials from The Carlyle Group as part of an industrywide investigation of the use of placement agents in connection with obtaining business from the New York State Pension Fund," said Richard Bamberger, a spokesman for Cuomo.

"With respect to Carlyle, the matter was resolved in May 2009," Bamberger said.

Despite repeated questions, Bamberger and others in Cuomo's office would not say whether Carlyle was or was not under investigation in New York in December 2008.

But a source close to the investigation said New York officials considered Carlyle to be under investigation from 2007 until May 2009, when the case was settled, but added the company was never sent an official notification it was being investigated, or given specific dates as to when the investigation had begun or ended.

Ullman stressed that it was Carlyle Infrastructure Partners (CIP), not The Carlyle Group, which answered the Connecticut DOT questions and made the proposal, along with Subway, to the state. He said Cuomo never investigated CIP and the company had nothing to do with Carlyle's dealings with New York pension funds.

"CIP was never involved in any activity relating to the payment of placement agent fees that were the focus of the New York investigation. The New York investigation did not relate to CIP in any respect, and on December 22, 2008, it would not have had any effect on the proposer's ability to provide services to Connecticut," Ullman said

Still, Connecticut officials, including Blumenthal, DOT negotiators and legislators, clearly considered that The Carlyle Group, as well as CIP, bore responsibility to report and used "Carlyle" synonymously with CIP in discussing the matter.

`We took it seriously'

Blumenthal's letter was written after Hearst Connecticut Newspapers asked his office questions about the New York investigation of Carlyle, news accounts about that investigation published in 2007 and whether the company's answers to Connecticut's questions were truthful.

Hearst has learned that DOT officials vetting Carlyle's proposal discovered the New York investigation from an April 2009 New York Times story that reported Cuomo was looking into the Carlyle Group. That information came while they were negotiating final details of the rest stop contract with Carlyle and members of its partnership.

The rest stop deal was awarded in November 2009 by Gov. M. Jodi Rell to a partnership formed under an umbrella company called Project Service. The partnership includes Doctors Associates Inc., owners of the Subway restaurant chain; Subcon, Subway's development arm; and Carlyle Infrastructure Partners.

Project Service will run and manage the state's 23 highway rest stops and invest more than $185 million to rebuild and renovate them. The state will receive a much smaller share of fuel and concession sales than it garnered under the previous operator, Exxon Mobil.

After learning of the New York investigation, state officials called Carlyle representatives into a meeting and demanded explanations. A key participant said the Connecticut officials were concerned and considered disqualifying Carlyle. But in the end, officials settled for an affidavit in which a Carlyle affiliate swore that no Connecticut official was bribed to win the contract.

"We were really, really surprised by the New York Times article. It ... caused us a great deal of concern," said Gale Mattison, then a financial officer for the Office of Policy and Management and who served on a committee that reviewed and negotiated final terms of the rest stop contract.

"We took it seriously and in some ways it scared us, because who wants to get in the middle of these very politically powerful entities and try to figure out who's telling you the truth?" Mattison said.

State lawmakers, after being shown Blumenthal's letter, were quick to raise their own concerns.

"It should have been disclosed at the time," said state Sen. Toni Boucher, R-Wilton, and the ranking Republican on the Transportation Committee.

"All the cards should be on the table," Boucher said. "If you're doing business with someone and ask them the question, it's important for things to be put out there," she said, adding that Carlyle should have made the state aware of the New York investigation.

"I'd think it reflects on the integrity of the whole process," said state Sen. Donald DeFronzo, D-New Britain and co-chairman of the Transportation Committee.

"We have disqualified bids on a lot less than this. Something of this magnitude needs to be examined in much greater depth," DeFronzo said.

`This deal has always smelled'

Under state law, any company that submits a bid or responds to a request for proposals is required to answer questions truthfully and can be disqualified if falsehoods are discovered.

Blumenthal's request to the DOT cannot force the agency to take action and is advisory only. The DOT can conduct a new review as Blumenthal suggests or ignore the attorney general's concerns altogether. Only the DOT can challenge the already-signed contract by taking the matter to court.

Friday, DOT spokesman Judd Everhart said: "DOT counsel has double-checked and independently confirmed that the statements made by Carlyle regarding when they learned that Carlyle was the subject of an investigation by the New York AG's office were true and accurate. DOT is satisfied that Carlyle truthfully answered the questions in their proposal of December 22, 2008, and that they didn't learn that they were the focus of an investigation until April 18, 2009.

"We will be preparing a response confirming the results of our independent investigation to the Connecticut Attorney General's letter."

State Sen. Andrew McDonald, D-Stamford, one of the most vocal critics of the rest stop contract, said he's not buying Carlyle's explanation or the DOT's speedy response to Blumenthal.

"So (the DOT) basically thumbed their nose at the AG's suggestion of a review of the circumstances under which one of the largest vendors in state history lied on their application? If somebody lied on a job application about having a criminal history, they'd be fired immediately. In this instance, you have a major corporation making an apparent material misrepresentation about a fundamental aspect of their proposal," McDonald said. "This deal has always smelled, and it's beginning to rot."

The New York Post in August 2007 reported The Carlyle Group had allegedly paid millions to Searle & Co., a Greenwich company that had ties to former New York State Comptroller Alan Hevesi. The Post said "officials from Carlyle had been questioned by investigators for Cuomo" and that Cuomo was jointly conducting an investigation with an Albany County district attorney.

That investigation in part focused on Hank Morris, a placement agent on several Carlyle deals. According to a federal Securities and Exchange Commission complaint, the firms allegedly paid $10 million to Searle, the company Morris worked for, and nearly half of that was funneled to Morris.

Morris and associate David Loglisci were indicted in 2009 on 123 counts of bribery, larceny, money-laundering and fraud in connection with a multimillion-dollar pay-for-play scheme involving the New York State pension system. Carlyle and Searle & Co. were not charged with any crimes. Loglisci pleaded guilty to securities fraud in March of this year. The case against Morris is pending.

Carlyle's $20 million settlement with Cuomo represented repayment of profits the company earned as an "unwitting beneficiary" of wrongdoing, according to the settlement.

Connecticut DOT officials said that after they found out about the New York investigation from the New York Times, they summoned Carlyle to a meeting.

"We did talk to them (Carlyle) and told them if they really had done something wrong here that Carlyle would be excluded and Doctors Associates (Subway's parent company) would have to do their financing differently," said Mattison, who served on a committee that reviewed bids and negotiated the final contract.

"We said Carlyle could be kicked out of the process as far as we were concerned," he added.

But Mattison also said there was some concern that the state didn't have a solid case to disqualify Carlyle because the company was insisting it had done nothing wrong, didn't know about the investigation and was willing to sign an affidavit.

Mattison said that for the state to throw Carlyle out "based on we don't like what we see" would have left Carlyle with "a basis to challenge we've done them harm."

"And when we asked Carlyle to sign ethics affidavits, they signed them. If they had turned around and said, `Well, we've got to change these words, do this, don't know if we can tell you that,' that would raise red flags. I don't remember that happening. They signed them. Their attitude after that settlement was done was, `What do we need to do or provide you to assure you we're clean?' " Mattison said.

The affidavit was signed by a top official with Carlyle Infrastructure Partners.

`Carlyle was surprised'

Mattison said he believed the Carlyle representatives working in Connecticut when they said they knew nothing about the New York investigation.

"Stop and think about how big The Carlyle Group is. We were dealing with a couple of fund managers out of New York City that have their own little world. What is happening around the attorney general in New York is a much bigger Carlyle world," Mattison said.

The Carlyle Group, the world's largest private equity investment firm, employs more than 890 people, including 495 investment professionals in 20 countries. It manages $88.9 billion in equity capital, far more than the annual budgets of many countries and U.S. states, including Connecticut.

"I can see where they were surprised. So my honest opinion is the people we were dealing with, they didn't know (about the Cuomo investigation). It is my honest opinion that I don't think those people had any idea," Mattison said.

Ullman said the first time the New York attorney general's office threatened direct action against any Carlyle entity was Saturday morning, April 18, 2009.

"Carlyle was surprised by the phone call," he said.

Carlyle "briefed" Connecticut officials about the call within three days, Ullman said. "Carlyle voluntarily cooperated with the requests for information."

"It appears Carlyle knew it was the target of a governmental investigation before it ever submitted its proposal," McDonald said. "It's equally clear they did not answer the relevant questions accurately or truthfully or that they voluntarily ever supplemented their bid documents until confronted.

"And yet (the DOT) has entrusted the next 35 years of operations at these rest stations to a company that from the beginning has been untruthful. That's pretty sad. I fail to understand how the department never disqualified them," he said.

DeFronzo, the Transportation Committee co-chairman, said, "It's hard to believe you pay a $20 million (settlement) several months after this bid is submitted and not have any notion you were under investigation."

Investigative reporter Bill Cummings can be reached at 203-339-5790 or bcummings@ctpost.com. Brian Lockhart can be reached at 860-727-9547 or brian.lockhart@scni.com.