Friday, December 20, 2013

Unbaked Bread

Unbaked Bread

Yesterday I discussed the recommendations contained in a document recently released by the North Carolina Department of State Treasurer entitled, “Report Concerning Placement Agent Review.[1] The report stems from a series of improprieties by placement agents in other states; most notably California, New Mexico, and New York, and concerns that improper practices may have occurred during the tenure of the previous, Richard Moore.  If you download the report and search for my name, make sure to use “Andy Stilton,” or you’ll miss the fact that Louis Dworsky, a placement agent stated that he knew my successor Pat Gerrick, Treasurers Boyles, Treasurer Moore, and me.

Before I write more about this report, I want to be clear that I haven’t discussed this report with Treasurer Moore or any of my former colleagues, Treasurer Cowell or any of her current or former employees, including Pat Gerrick, or any money manager, or placement agent, whether or not they are mentioned in this report.The thoughts expressed are purely mine.   I did email Treasurer Moore the link to the report shortly after the State Treasurer’s office kindly emailed me the link.
Coordination (1996)
This Treasurer’s report has been in the works for years, and yet it reads like the first draft of an internal memo.  Some of the incidents sound serious, and others don’t seem worthy of a public document.   I couldn’t possibly lay out all the serious points and the defects without writing a post that is longer than the Treasurer’s report, so I’ll use a couple of illustrations.

A potential concern:  The report cites an incident where an incumbent money manager, Avista, hired a placement agent, Aqueduct, at Treasurer Moore’s  insistence.  According to Avista’s co-CEO, Treasurer Moore wanted Aqueduct to perform additional due diligence, although it isn’t clear from the report what Treasurer Moore was concerned about.  Apparently, the President of Aqueduct, Frank Edwards, had unspecified “personal ties” to the former Treasurer.  According to the report,  Aqueduct was paid $1 million by Avista shortly after the pension plan agreed to invest with Avista.[2]  

I used the word “incident” rather than “allegation” because the report  never reaches a decisive conclusion about this or any other matters.  Rather, the report is clever in using inferences to imply the potential of improper behavior.    Here are some examples from the section of the report on Avista:

·                            An independent consultant as well as internal staff had already conducted due diligence, thus                leaving the reader to infer that the Treasurer’s desire for additional due diligence was                          unnecessary.

·                           The state had previously invested with Avista and yet the manager hired a placement agent, Cue          Capital.   This sounds nefarious if you don’t understand the money management business.  In              raising a second and larger fund, Avista was probably looking for introductions to new potential          clients.  Cue Capital really has nothing to do with this incident, but it adds a bit of color to the              story the report is trying to convey.

·                          At one point, Treasurer Moore met with Avista’s co-CEO in the Hamptons.  The location is                irrelevant, except that it adds another bit of color to the story. 

·                          The report concludes that Avista was unaware of any due diligence work or reports generated by          Aqueduct.  This leaves the inference that Aqueduct didn’t do any work.

In defense of their work, the authors of the report would point to the caveat that precedes all nine manager incidents and is repeated several times in the report:

Because the Special Review was conducted without subpoena power, these findings can be neither corroborated nor refuted by facts not voluntarily disclosed, and there is no guarantee that the findings are either complete or accurate. The findings of fact attached to this package merely summarize the facts observed using the limited tools available. Given these limitations, we note with great emphasis that the findings of fact summaries draw no conclusion about whether any events violated laws or State policies. (emphasis added).[3]

In other words, the report lays out some observations, leading to remedies (which I’ll discuss on Monday), and pages and pages of new policies.  However, the authors can’t determine if any of this is true or not.

The material for this section of the report appears to be drawn from an interview with the co-CEO of Avista and some emails.  It also looks like electronic calendars might have been consulted.  According to an article in the News & Observer,[4] Treasurer Moore says he was never interviewed.  Moreover, it doesn’t appear that Mr. Edwards or Ms. Gerrick was interviewed.  While I’d never heard of Aqueduct before reading the report, I quickly found their website on the Internet.[5]  They appear to have some real experience in investments and as a placement agent.

It is unusual for an investment decision-maker, like the State Treasurer, to ask a money manager to hire a consultant/placement agent on his behalf.  Moreover, I agree with the Report that full disclosure of this type of relationship is warranted.  However, if this incident were a loaf of bread, the bread is missing key ingredients and shouldn’t have been put on the shelf for the public to buy.

Also of concern:  The report lays out an incident involving Longview Advisors[6], a global equity manager in London.  They had hired Whitman & Company, a small investment bank, as a placement agent.  Whitman, in turn, hired Howard Street Partners as a subagent to help gain access to North Carolina.  It turns out that one of the principals, Teresa Meyers of Howard Street, was married to an internal consultant, John Burns, who was temporarily overseeing the pension’s equity program.  According to the report, Mr. Burns was very much involved in reviewing and recommending the state’s investment with Longview.

The report infers that Longview failed in its duty to avoid the conflict it created by hiring Howard Street.   It’s the State and not Longview that had a potential conflict.  The report also cites Longview for not reporting its indirect relationship with Howard Street.  While it would have been nice of Longview to make the disclosure, I don’t believe they were under any such requirement at the time.  Moreover, I’m pretty certain senior folks at the State knew about the relationship and may have even been concerned.  As far as I know, Mr. Burns’ marriage to Ms. Meyers wasn’t a secret.

The facts outlined in the report raise obvious questions about conflicts and disclosure.  Once again, it doesn’t appear that many of the key figures were interviewed to ascertain what they knew about the relationship between Mr. Burns and Ms. Meyers as well as Mr. Burns’ involvement with the investment.

Irrelevant to the Report: Moving from the potentially serious to the irrelevant, the report cites a manager, Angelo Gordon, for passing along the resume of Ms. Gerrick’s daughter to a prospective employer.  This section of the report also cites Ms. Gerrick’s and her daughter’s use of a managing director’s apartment for one night.  The report concedes that Angelo Gordon never used a placement agent, which leaves a big question.[7]  Why was the resume referral and use of the apartment included in this report?  Titillating perhaps?  These incidents required a possible reprimand or a slight tweak to some internal policy.  However, this incident doesn’t belong in a report that is supposed to be about serious problems with placement agents.  Amazingly, Angelo Gordon entered into a “resolution” of this matter.[8]

Strange Documentation:  A placement agent  furnished Ms. Gerrick’s daughter with an airplane ticket to go to a festival in the Bahamas.  This occurred shortly after the placement agent’s client, Rebeco, received a commitment from the pension plan. The placement agent was also a long time friend of Ms. Gerrick.  The Report says it got its information from previous reports in the press.[9]  I found the story in the News & Observer.[10]  The news article cited internal emails from the State Treasurer’s office.  It’s hard to understand why the report is relying on a news story when the newspaper is saying they got the information from the Treasurer’s office.

Coda: In attempting to see if the campaign contribution data concerning both the current and former treasurers was accurate, I went out to the Follow-the-Money.Org[11] and the North Carolina Board of Elections websites[12].  By coincidence, I recognized the name of a manager and his wife on the first page of the first report I pulled up on Treasurer Cowell’s 2008 campaign. The name was familiar because I’d conducted due diligence on the manager during my tenure as CIO.  The manager was hired by the pension plan some time in 2012 according to a report on the Treasurer’s website.   I could construct a set of inferences that might imply that the manager wouldn’t have been hired but for his contribution.  However, that wouldn’t be fair to the manager, the State Treasurer, and most importantly, the beneficiaries of the plan.  While I have some data, I don’t have enough information to make a loaf of bread, let alone put it on the shelf.

On Monday, I’m going to write about the remedies reached in eight of the nine incidents.  I promise it will be a shorter post.

[2] Report, tab2 at pages 3 to 5.
[3] Report at Tab 1, page 2.
[6] Report at Tab 2, Pages 9-11
[7] Report at Tab 2, Page 12
[8] Report at Tab 2, page 14
[9] Report at Tab 2, Page 15

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