Wednesday, April 23, 2014

Truthiness and Scary Language

Truthiness and Scary Language

A gift arrived at my electronic doorstep yesterday.  The State Employees Association of North Carolina issued a report on the North Carolina pension plan entitled North Carolina Pension’s Secretive Alternative Investment Gamble: A Sole Fiduciary’s Failed “Experiment”.  The report conducted by Benchmark Financial purports to be scathing indictment of the investment practices of North Carolina’s State Treasurer and calls for investigations by a collection of federal agencies.  I’ve learned at least one thing from this 147-page report.  If you make dozens and dozens of incorrect assertions, assumptions, and inferences, it is almost impossible for anyone to formulate a coherent response.  

After reading the report, I wasn’t sure where to begin in untangling the mistakes.  Moreover, if the report weren’t aimed at undermining the integrity of and confidence in our State’s pension plan, I would have gotten some great amusement out of this material.  However, critics of the State Treasurer and public pension plans are likely to cite the report as gospel in their attacks.  Rather than contributing to the debate, Edward Siedle, the author of the report, may have inadvertently created a career opportunity for himself.  Mr. Siedle should consider auditioning to replace Stephen T. Colbert in the 11:30 time slot on Comedy Central.  The report reads lead just like the material that rolls off Mr. Colbert’s teleprompter.

We’re in annual report and proxy season, so you can probably retrieve one of those hefty documents from your recycling bin.  I’m not asking you to read one of these tomes.  Simply flip through it, and look at all the disclaimers and scary language.  The lawyers representing your mutual fund or stock ownership have filled those documents with warnings.  Have you looked at the first 15 to 20 pages of a prospectus for an initial public offering?  The lawyers usually insert a section called “risk factors” that reads very much like the language referenced by Mr. Siedle when he describes the risk of investing in an alternative investment. 

As in many other investment-related documents, there’s scary language warning that the portfolio may not be diverse, that the manager might have conflicts of interest, that certain portfolio positions will not be disclosed to investors, and that certain limited partners may have preferential relationships with the manager (North Carolina has probably negotiated a few of those for itself).  These are standard provisions in investment documents.  Savvy investors and their staffs conduct due diligence and have legal advice in order to come to grips with these types of provisions.  In other word, most types of investments contain scary language that investors have to work their way through.   Much of this discussion in Mr. Siedle’s report is contained in a frightening sounding section called “Mystery Investors Granted Licenses to Steal.” 

If ominous legal language was the reason not to make an investment, then all of us should discontinue our Internet Service, shutdown our Twitter and Facebook accounts, and cancel our credit cards.  There are valid investment reasons to be concerned about private equity and hedge fund investments, but the language in legal documents isn’t very high on the list.

As I mentioned at the outset, there are too many errors in SEANC’s report to cover them all.  I’ll close with another error and false conclusion in the report.  Mr. Siedle notes that the Treasurer disclosed the management fee but not any incentive fee for Fortress Credit Opportunity Fund.  He then goes on to intimate that the State Treasurer must be hiding the additional fee.  He spends a couple of pages trying to estimate these hidden charges.  Obviously, it serves SEANC’s purpose to claim that Fortress’s true fee is many times greater than the $210,000 reported by the State Treasurer.  However, if Mr. Siedle looked more closely, he’d see that the Fortress investment was initiated in 2012, and that only $24.8 million out of a $75 million commitment had been invested.  In short, there is no incentive fee because Fortress hasn’t earned one.

As David Ranii reports in the New and Observer when pressed by a reporter, Mr. Siedle said, “I’m not saying anybody has stolen anything. I’m saying that money has been moved into the shadows.” 

Stephen Colbert explained his television persona through the term truthiness.  Mr. Colbert explained, “We're not talking about truth, we're talking about something that seems like truth – the truth we want to exist".  Now you know why Mr. Siedle should audition.

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