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The chairman of private equity fund Markstone Capital Partners, which centers its operations in Israel, has pleaded guilty to charges that he gave out close to $1 million in illegal gifts in order to secure a $250 million investment from the New York State pension fund.

Elliott Broidy has resigned all of his operational and supervisory roles at Markstone, and has been replaced as chairman by Dan Gillerman, the former Israeli ambassador to the United Nations and former chairman of the Federation of Israeli Chambers of Commerce.

The California venture capitalist made an unannounced appearance in a Manhattan courtroom to admit to a felony charge of rewarding official misconduct.

Prosecutors said the state invested $250 million in Markstone after Broidy showered them with gifts and favors, including trips, payouts to friends and relatives and a secret investment in an obscure movie called "Chooch," produced by an official's brother.

"This is an old-fashioned payoff of state officials," New York Attorney General Andrew Cuomo said. "This is effectively bribery of state officials, and not just one but a number of state officials in the comptroller's office." The investigation against Broidy has been going on for two years.

Markstone is the largest private investment fund in Israel. Its Israeli managers, Ron Lubash and Amir Kess, said they were not under investigation and its Israeli investments were not affected in any way by the case, and the fund would continue operations.

However, a number of Israeli capital market figures were much less optimistic about Markstone's future and its attempt to project business as usual. It faces a number of potential threats to its existence, such as a decision by the U.S. Securities and Exchange Commission to shut it down or decisions by its American pension fund investors - especially from New York - to withdraw their money.

A source in the Israeli capital markets told TheMarker a few months ago that it was difficult to understand how Lubash and Kess, former investment bankers with no experience in private equity funds, managed to raise $800 million, including from such a sought-after investor as the New York State pension fund. Now it is clear how they did it: Broidy, who received the lion's share of Markstone's management fees, bribed them.

Markstone was founded in 2003 and raised its first $400 million in February 2004. The fund has invested in Israel in such well-known firms as Steimatzky and Netafim, as well as in the Prisma investment house, which recently merged with Psagot.

Of the $800 million Markstone has raised, about 90 percent came from U.S. pension funds. The fund's success with the U.S. investors helped it to raise tens of millions of dollars from Israeli institutional investors such as Bank Hapoalim and Bank Leumi, as well as insurance companies and pension funds.

As of the end of June, Markstone had invested $552 million of the funds it raised.

Markstone's Strategic Advisory Board includes former Teva chairman Eli Hurvitz and Jacob Perry, the chairman of United Mizrahi Bank and former director of the Shin Bet security service.