« Ind. Courts - Still more on: A Marion County public defender caught in child solicitation sting | Main | Courts - Blogging about cases pending before the Supreme Court »

Thursday, May 07, 2009

Law - "More States Start Pension Inquiries "

Mary Williams Walsh has a long story today in the NY Times examining fraud related to state pension fund investment across the county. Problems in New York, Texas and New Mexico are featured. Some quotes:

The sprawling investigation into New York’s pension investments hints at a much bigger problem than the handful of indictments so far would suggest.

What started as an investigation by the New York attorney general, Andrew M. Cuomo, into the state comptroller’s office — where Mr. Cuomo says favors were being exchanged for contracts to invest pension money — has mushroomed into a broad look at more than 100 firms by attorneys general in at least 30 other states.

A survey of practices across the country portrays a far-reaching web of friends and favored associates: political contributors, campaign strategists, lobbyists, relatives, brokers and others, capitalizing on relationships and paying favors. These influential figures can determine how pension funds are invested, as well as state university endowments, municipal bond proceeds, tobacco settlement funds, hurricane insurance pools, prepaid tuition programs and other giant blocks of public money.

“What has developed is a corrupt system, where Wall Street, various fiduciaries, politicians and corporate managers are draining America’s savings,” said Frederick S. Rowe, a hedge fund manager who serves on the Texas Pension Review Board, an oversight body. * * *

Investing public money on the basis of political considerations, rather than merit, heightens the risk of waste and loss, an urgent issue given the market losses of the last year. In 2007 the Government Accountability Office studied a group of pension funds known to be advised by consultants with conflicts of interest, and found their average yearly investment returns were 1.3 percent lower than those of other pension funds. That may sound small, but it can severely erode a fund over time because the losses multiply. * * *

In recent weeks, the New York comptroller and officials in other states have issued rules barring the use of intermediaries — often called placement agents — who are paid by money managers to open doors and help them win allocations from state and local governments. But even those restraints, long resisted, may not work well. Across the country, an examination of practices suggests that time and again pension officials are making poor investment choices and incurring losses because personal connections skew their decision-making. * * *

The New Mexico council recently disclosed that a top fund-raiser and political ally of the governor, Marc Correra, was paid a placement fee by the investment firm that sold the toxic mortgage securities criticized by Mr. Foy. The records also show that Mr. Correra has been paid roughly $11 million as the placement agent for more than 20 other investments — all private equities, hedge funds and complex structured debt — that have come through the investment council’s door since Governor Richardson took office in 2003.

Investments like those promoted by Mr. Correra, called alternative investments, are controversial for public investment funds to invest in because there is not a ready market for them should the government suddenly need money. They are hard to value, too, and they carry higher risks in the pursuit of higher returns. The investment firms that offer them tend to earn much higher fees, which means a bigger cut for the placement agents.

Mr. Correra’s lawyer, Ronald L. Rubin, said his client earned his fees through hard work and believed he had complied with all the rules. “He wants to follow the law,” said Mr. Rubin, with the firm of Tannenbaum, Helpern, Syracuse & Hirschtritt in New York.

Governor Richardson has suspended new investments in private equity firms, hedge funds and other alternatives.

Posted by Marcia Oddi on May 7, 2009 08:07 AM
Posted to General Law Related