Private equity firm Quadrangle Group is to spend the coming months laying the groundwork for raising a new fund, now that a long-running pay-to-play probe has been settled, a source familiar with the situation said on Thursday.

Quadrangle earlier on Thursday settled the probe that had been hanging over it and which still dogs its departed co-founder Steve Rattner.

Rattner's departure and the investigation had been the obstacle to Quadrangle raising fresh money from investors.

The firm has largely invested its $2 billion second fund, which it finished raising in 2005, and had put plans for a fresh fund on hold during the turmoil.

Quadrangle is to spend the coming months laying the groundwork and then meeting with investors, with the aim of at some point starting to raise a third fund, the source said.

Raising fresh capital is still very difficult for private equity funds, and whether it is successful in winning investors' confidence and dollars remains to be seen.

Rattner had been one of the key people at Quadrangle, a media-focused firm which has investments in companies such as movie studio Metro-Goldwyn-Mayer .

He quit Quadrangle in 2009 to run U.S. President Barack Obama's auto bailout task force, a post he left a few months later to return to private life.

Quadrangle distanced itself from its past on Thursday, saying in a joint statement issued with the New York Attorney General on its website we wholly disavow Rattner's conduct, which it described as inappropriate, wrong, and unethical.

A spokesman for Rattner did not immediately provide comment when contacted.

Investors had the right after Rattner quit to halt new investments by its existing fund. New York City and state pension funds indeed voted to block new investments, but despite that, Quadrangle won the overall vote of confidence from investors, a source said at the time.

A former New York Times reporter, Rattner worked with No. 1 U.S. cable television operator Comcast Corp as an adviser on its failed bid for Walt Disney Co and as an investor in its purchase of MGM. He also was on Cablevision Systems Corp's board.

Rattner also has advised New York Times Co Chairman Arthur Sulzberger Jr on the newspaper group's troubles in recent years, and struck a deep friendship with the publisher when they reported from the Times' Washington D.C. bureau three decades ago.

Rattner retains an economic interest in Quadrangle, according to the source who spoke to Reuters.

Quadrangle's settlement will see it pay New York State $7 million and pay $5 million to settle the SEC's charges.

That capital will come from the fund's general partners, meaning the executives that run and invest the money, not the limited partners -- the pension and endowment funds that invest in it -- the source said.

(Reporting by Megan Davies, editing by Maureen Bavdek and Matthew Lewis)

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