Pension placement agents under fire — again

LOCKYER LEGISLATION — State Treasurer Bill Lockyer wants a new CalPERS disclosure requirement for investment “placement agents” to be extended by legislation to public retirement systems throughout the state. “There are many public pension systems in California that really need to have this requirement in place as well,” Steve Cooney, a Lockyer aide, told a CalPERS subcomittee Friday (May 8). CalPERS board member Louis Moret said he hopes “the rest of the country” will follow the example of the disclosure policy CalPERS is expected to adopt Monday. “I hope our sister agency, CalSTRS and others, will incorporate this,” Moret said. Actually, CalSTRS adopted a similar disclosure policy three years ago. To see a draft of the CalPERS disclosure policy, click here.

UPDATE — Two members of a Los Angeles public pension board, Elliott Broidy and former CalPERS president Sean Harrigan, resigned a month after the federal SEC asked to look at their income, the Los Angeles Times reported. To see story, click here.

State Treasurer Bill Lockyer wants the middlemen who help money managers get investments from pension funds to register like lobbyists.

CalPERS President Rob Feckner asked staff to draft a policy to make sure that investment “placement agents” and their fees are fully disclosed.

New York Attorney General Andrew Cuomo announced Friday (May 1) that he has issued subpoenas to more than 100 investment firms and their agents.

Cuomo said he talked with representatives of 36 state attorney generals and they agreed to form a “multi-state task force” to explore pension fund abuse.

“The task force will allow us to have a unified, efficient method for gathering information as we fight to combat corruption and restore transparency and integrity to public pension funds,” Cuomo said in a news release.

It’s the fallout from charges against several persons said to have received payoffs for helping financial firms get investments from the New York state pension fund.

One of the accused, Hank Morris, a top aide to former New York Comptroller Alan Hevesi, was affiliated with a “placement agent” or middleman firm, Searle & Co.

Now Cuomo’s office and the federal Securities and Exchange Commission are reportedly looking at two California placement agents, Wetherly Capital Group and Gold Bridge Capital.

A non-profit journalism investigative agency, ProPublica, reported that Wetherly and Morris’s firm shared fees for helping a private equity firm “seal three multimillion dollar deals” with CalPERS, CalSTRs and Los Angeles Fire and Police Pensions.

The founding partner of a firm that has a contract with the Los Angeles fund, Aldus Equity of Dallas, was charged with fraud by Cuomo, the Los Angeles Times reported.

The Times previously reported that the SEC has asked for personal financial information from two of the Los Angeles fund’s board members, Elliott Broidy and Sean Harrigan, a former CalPERS president.

The California state treasurer, Lockyer, who sits on the boards of CalPERS and CalSTRS, sent letters to the two pension systems last week requesting a review of any deals with investment managers or placement agents cited by Cuomo or the SEC.

Lockyer asked that results of the review be made public, to the extent legally permitted, and that the pension boards be told of any companies that fail to provide information, along with their reason for withholding.

In his letter to the CalPERS president, Lockyer noted that Feckner has asked staff to draft a policy for board consideration on placement agent identification and fee disclosure.

“I request that you direct staff to consider a formal registration and reporting requirement for those who act as placement agents and for those who employ them,” Lockyer wrote, “similar to the statutory lobbyist registration and reporting requirements for those who seek to influence California state officials and legislators.”

Cuomo’s office found widespread use of placement agents — 45 on New York state pension fund investments from 2003 to 2006 and 41 for the New York city pension fund during the same period.

Cuomo’s office seems to be suggesting that the agents should be registered as securities brokers under state and federal law. But only half or less of the placement agents were registered.

In California, Lockyer said in an interview, most of the investment pitches he has heard have included a disclosure of any financial incentive or interest. But it’s not always clear.

“You bump into people and talk about some terrific investment, and you have no idea whether they are actually a hedge-fund managing the money, or a placement agent or a business person that’s from that business,” he said.

In his letter to CalSTRS, Lockyer praised the California State Teachers Retirement System for adopting a policy requiring placement agents and others to disclose their identity and financial interests.

CalSTRS adopted the disclosure policy in November 2006, two months before Lockyer was sworn in as state treasurer and became a member of the boards of CalSTRS and CalPERS.

A staff report to the CalSTRS board in April 2006 said that when a transaction came before the investment committee it was already “relatively common” for a member to ask whether a placement agent was involved.

“While there is nothing inherently problematic with the use of placement agents,” said the staff report, “controversies have erupted in the past owing to a combination of factors such as the high amount of the fees received by placement agents and the political or other connections that are sometimes employed by them.”

In an echo of the current New York scandal, the CalSTRS staff report said a former board member of the Illinois Teachers Retirement System faced a federal charge of seeking kickbacks from firms trying to get investments from the pension fund.

“At its core, the allegation is that the former board member told investment managers that they had to pay fees to placement agents in order to obtain business from the system,” said the staff report. “Then, a portion of such fees was to be subsequently ‘rebated’ in the form of political and charitable contributions directed by the board member.”

The staff report mentioned a story that said the Illinois teachers retirement board was unaware of a high fee, $4.5 million, paid to a placement agent by a private equity group selected to manage $500 million for the pension fund.

In another echo of the New York scandal, the $4.5 million fee was paid by the Carlyle Group, recently described by the New York Times as “one of the nation’s largest and most politically connected private equity firms.”

An SEC complaint alleged that Carlyle and another firm, Riverstone Holdings, paid a $10 million fee to Searle in a New York energy fund deal, with nearly half of the money going to the accused Morris, the Times reported.

In California, the two big pension funds have given Carlyle several billion dollars to invest. CalPERS has committed about $4 billion to 27 different Carlyle funds. CalSTRS has a $1.2 billion commitment to three Carlyle funds.

“We ought to review CalPERS and CalSTRS investments to see if there has been any questionable practices,” Lockyer said when asked about Carlyle.

But, he said, it‘s “probably important” to note there have been no allegations of New York-style corruption here.

“There has been no claim that in California there has been some staff member who took bribes or something of that nature,” Lockyer said.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 3 May 09

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