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The Second Biggest Cover-Up In North Dakota History: Part IV PDF Print E-mail
Written by Chet   
Tuesday, 18 May 2010 19:00

Reasons I Think It's Not Unreasonable To Be Concerned About The Funds Managed By North Dakota's State Investment Board

(This is part IV of a multi-part blog post.  For Part I, click here and for Part II, click here and for Part III, click here .  To understand some of the acronyms, etc., in this part, you may need to read the previous part(s).) 

2. Public Pension Funds Targeted 

If you think about it, state public pension funds are what a Navy pilot might call a "target rich environment" for unscrupulous garbage investment opportunity managers.  If other state's funds are run like North Dakota's SIB, decisions on where to invest hundreds of millions of dollars are made by unsophisticated board members.  I mean no disrespect to the members of the board, but the ones who show up are generally not trained to be investment professionals.  I am also not a trained, certified investment adviser, so I can unequivocally say that I wouldn't be qualified to do the job many of them are also unqualified to do, too.  The difference is... I don't sit on the State Investment Board.  Most of these folks are probably great teachers and great state agency employees.  But they are expected to show up for these meetings, hear a 20 minute power-point presentation from some slick, Wall Street snake oil salesman and then they vote. 

Around the nation, public employee retirement funds have been targeted by these unscrupulous investment managers.  A quick survey of the nation will tell you that similar funds in New York (2), Ohio, Michigan (2), New Mexico and California have had public pension funds cheated or mismanaged in one way or another, or alleged to have been cheated or mismanaged.  Sometimes it's through kick-backs to fund managers.  Sometimes it's through "pay-to-play" deals where consultants or user groups take bribes in exchange for support of an investment.  Sometimes it's just been stupid, risky investments and mismanagement.  Attorneys General in states where Attorneys General actually enforce the laws are going after unscrupulous fund managers.

"So what?" you ask.  "The North Dakota State Investment Board has a top-notch, first rate staff that knows how to screen out any unscrupulous snake-oil salesmen, so we don't have anything to worry about." 

Well... maybe not.

In California, Attorney General Jerry Brown (D) recently brought a civil action against State Street Global Markets.  Coincidentally, North Dakota's SIB has tens of millions of dollars invested through "State Street Global Advisers."  (See the 2009 Annual report at pp. 11, 62, 64, 150, 152, and 153).  California's Attorney General A.G. Brown claims State Street, over a period of many years, defrauded California's public employee retirement system by messing around with exchange rates on foreign money transactions.  Brown is seeking to recover those funds.  Brown claims State Street defrauded CalPERS out of at least $56 million dollars, and as much as a couple hundred million dollars.  Does this mean State Street is defrauding North Dakota's fund?  Of course not.  But is it cause to be concerned that North Dakota's fund might be the victim of a fraud by State Street or some other company?  Sure.

And there is at least one more, and may be others.

We know already, for example, that North Dakota has been the target of at least one of these scams.  This is from page 52 of the SIB's 2009 annual report:

In February, 2009, the State Investment Board (SIB) was notified of legal action being taken against one of its investment advisors. The principals of WG Trading Company, the broker/dealer for the Westridge Capital Management portfolios, were charged with securities fraud for allegedly diverting investor funds for their personal use.

2009 Annual Report of the SIB (More here)

Read more about WG and Westridge by clicking here.

You might wonder why you haven't heard much about the Westridge/WG bad investment situation.  (It has drawn the attention of our local media a couple times, but barely.)  Perhaps this provides some insight:

A March 11 statement by the $4.2 billion North Dakota State Investment Board, Bismarck, a Callan client, noted that North Dakota had recovered only $23.3 million of its $161.3 million invested with Westridge, hired in 2000 after passing muster with Callan. Asked if North Dakota would consider Callan partly responsible for any losses the state fund might ultimately suffer, Steve Cochrane, executive director of the retirement and investment office, said in ane-mail: "It is far too early to entertain any such discussions.''  Questions about investment consultant liability are likely to provide a growing supply of grist for the legal mill, said William A. Schmidt, a Washington-based partner and ERISA expert with law firm K&L Gates LLP. Cases will likely hinge on what constitutes fiduciary investment advice and what constitutes non-fiduciary consulting services, he said. While both firms' due diligence could come under scrutiny, some observers said the risk of liability probably carries more weight for Marsh & McLennan, whose balance sheet would be exposed if an institutional client pinned losses on its consultant.


How and why do state pension funds get targetted?  Well, one way they get targeted is that many states' lawmakers have not bothered to make it illegal for consultants to get paid from both sides.  Some of these consultants -- acting perfectly legally -- get paid by offices like the RIO office AND they get paid by the companies looking to get huge capital injections from public pension funds.  The fees these middlemen can get paid are outragious.  Here's an example...

Earlier this month, a California venture capitalist pleaded guilty to helping his company land a very rich deal with New York’s pension fund. In order to manage a $250 million portion of the $126 billion state pension, Elliott Broidy gave nearly $1 million in gifts to officials in the state comptroller’s office.

The details are sordid. He handed out rent for the girlfriend of a state worker who helped invest pensions. He paid a management fee to a consultant. He helped an official’s relative. He paid for luxurious trips by “a very high-ranking” official — all to gain management fees worth about $18 million

New York Times

See... even the RNC's former finance chair will do all kinds of sketchy stuff when there's an $18 million fee on the line.  This is yet one more reason why the operation of our RIO office should be thoroughly audited; to determine whether anybody is doing this to North Dakota, and to propose legislation to make it illegal to do it, whether they are or are not.

But is this happening in North Dakota?  Who knows?  Who knows if the fund and methods of the fund have ever been looked at.  We just "trust" that everything in the investment of the nearly $5 billion fund is on the up-and-up.  But should we?

And... who does due diligence for the RIO office to make sure companies like WG and State Street don't rip off North Dakota's public pension funds?  And who is advising the SIB on where to put their billions of dollars?  And who did Steve Cochrane need to call the night before he took his life?  And who is assisting SIB in its search for a permanent Chief Investment Officer (CIO) and director of the RIO office?  And who helped scope Jack Dalrymple's "white wash" audit?  And is it possible the same company that does all this other stuff could also be one of the SIB's investment managers, managing millions of public pension fund money?

That's not possible, is it?  The conflict of interest would be far too obvious. Right?!?  (More later.)

Have you heard a lot about North Dakota's Attorney General Wayne Stenehjem taking an active roll in pursing investment managers that have bilked North Dakota's public pension funds?  He might say, "But WG is discharging all of its debt in bankruptcy!"  But not all debt is guaranteed to be discharged in bankruptcy.  For example, some debts that occured because of fraud are not automatically discharged.  Is Wayne Stenehjem -- or is anybody on SIB's behalf -- doing anything to stop WG from discharging its debt to North Dakota?  Have you heard anything about our Attorney General looking into State Street? 

Of course not.  He's busy cracking down on whistle blowers.

(Next up: Reasons I Think It's Reasonable To Be Concerned About The Funds Managed By North Dakota's State Investment Board: (3) Birth of the Prudent Investor Suggestion)

Comments (2)add comment

What the Heck said:

where to begin
Wow. No risk at our pension fund. Why worry.

The McLean SA letter prompted me to take a closer look at the California situation. How ironic that our state is worried about damage caused by whistleblowers when the State Street fraud was exposed by...whistleblowers. The whistleblowers (just google this case folks, if you're interested) assert the bank 'overcharged' their clientele by an estimated $400,000,000. That's a lot of zeros.

Nope, no need to worry that this could happen here.
May 19, 2010
Votes: +1

You da man. said:

Thanks Chet
You are amazing. Simply amazing. Thank you for the countless hours you put into this research. It is important!
May 19, 2010
Votes: +0

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