RALEIGH — The State Employees Association of North Carolina could receive significant monetary awards if it prevailed in a whistleblower complaint against those investing the state pension fund’s money. If the investment managers, Treasurer Janet Cowell, or her staff is found liable of wrongdoing, state taxpayers may be responsible for covering some of the costs of the award, according to the former U.S. Securities and Exchange Commission attorney who completed a forensic review of the retirement fund.
“It depends on who the SEC chooses to prosecute, or, for that matter, the FBI or other agencies” that might launch separate probes, said Edward Siedle of Ocean Ridge, Fla., founder of Benchmark Financial Services.
“If the state Treasurer’s Office is complicit in illegal activity, [the office] might be required to pay a fine. The treasurer herself could be,” he said.
Siedle’s forensic review found, among other things, $6.8 billion in investment losses, and $1 billion in fees paid to Wall Street money managers and political insiders, though only half that much was reported.
A spokesman for state Treasurer Janet Cowell told Carolina Journal Siedle’s report is wrong. The Treasurer’s Office also denied the allegations in the report in a letter to investment advisory committee members.
“You’ve got half of Wall Street managing North Carolina money. Contrary to what the treasurer says, there are hundreds more money managers involved in managing the pension than she’s disclosed. There are hundreds of millions more in fees than she’s disclosed,” Siedle said.
“So who might be tagged by any investigation is really quite widespread,” he said.
Siedle said the SEC has accepted SEANC’s whistleblower complaint about suspected irregularities in the pension fund representing 875,000 active and retired state workers.
“I would say that a reasonable scenario is that in the month to come we’ll hear” whether an investigation is under way, Siedle said. In addition to being a former SEC attorney, Siedle provided expert testimony in the trial of swindler Bernie Madoff’s investment fraud, and has testified about investment abuse before Congress.
The SEC Office of the Whistleblower was created in 2010 with a $450 million pool of reward funds under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
If a complaint leads to an enforcement action, the whistleblower is eligible to receive between 10 percent and 30 percent of money recovered through repayments, penalties, and fines. Investors and pension funds could receive the rest.
“Somebody said, ‘Oh my God they [SEANC] could profit from this?’ Of course they could profit from this. It’s their money” that helped to build the Teachers and State Employees Retirement System, Siedle said.
“I hope they profit handsomely from it. It will teach a very valuable lesson that introduces tremendous discipline into the process for the state treasurer to know that her actions will be monitored for compliance with the law, and there may be severe consequences” if improper actions are uncovered, Siedle said.
Generally, the SEC has jurisdiction over investment agencies, but not state treasurers. However, if state treasurers “are doing certain things involving money managers, kickback schemes, etc., misrepresentations, fraud, then the state treasurer could be pulled in to the [enforcement] activity,” Siedle said.
Since its inception, the whistleblower program has made six awards to eight whistleblowers, ranging from $25,000 to $14 million.
“North Carolina is unique in that it is one of the largest funds, it’s never been audited, it has a sole fiduciary. Those three things make it national news,” Siedle said of the state treasurer’s payments to investment fund managers.
“The treasurer says, ‘I can’t give you information on fund managers if they ask me not to because it’s a trade secret,’” said Ardis Watkins, SEANC director of legislative affairs. Who the officers of a fund management company are, how much they’re paid, “not one thing is considered something that the public has a right to know.”
Watkins said Cowell has invested $1 billion in pension fund money with Credit-Suisse. The international banking giant recently pleaded guilty to one reduced count of bilking the U.S. government out of taxes owed on investments and agreed to pay $2.6 billion in penalties.
Many of the funds of funds investments for which Cowell denies access to records are handled by Credit-Suisse, Watkins said. Given the bank’s criminal admission, Watkins added, “it’s plain stupid if we have blind faith” in its investment activities. “The public has a right to see these documents.”
Investment fund managers typically get 2 percent of the amount of money invested from the state pension fund, and 20 percent of the profit the investment makes, Watkins said.
Funds of funds are massive diversified investment portfolios much like mutual funds that handle only large transactions, so typically they’re open only to major public and private pension plans. But Watkins said investment fund managers often invest in funds of funds that are run by individuals “that are friends of theirs.” Each transaction charges the same 2 percent fee and 20 percent of profit.
“If we give them $500 million to invest, we’re not even sure at the end of that how much is actually being invested,” Watkins said.
Carousel Capital is one of TSERS’ fund managers. Erskine Bowles, former UNC system president and President Clinton’s chief of staff, is a founder and senior adviser of Carousel. Watkins said Cowell blocked SEANC from getting information on Carousel’s investments of state pension money by declaring them trade secrets.
When SEANC requested documents from Cowell related to the activities of Carousel and other fund managers, only one sentence was printed on the 78 pages released on Carousel investment activities. The other information was redacted and the pages were blank, Watkins said.
That is “a telling example because Erskine Bowles’ wife, Crandall, is one of the folks who’s been written up as a fundraiser for Janet Cowell at their home in Charlotte, and yet he’s partners in a firm that we can’t get any information on what the state’s paying him,” Watkins said.
“This is the kind of thing to us that’s absolutely unconscionable,” she said.
In an email, Bowles said he has had “very limited contact” with Cowell, and that his role at Carousel for the past eight years has been as an advisor. “I have no office there, and have had no active role in firm management,” he said.
Bowles added that Nelson Schwab, managing director of Carousel, told him that the firm has “disclosed all documents [relating to TSERS] to the full extent legally permissible without disclosing any trade secrets,” while adding that he would prefer even more disclosure of fees than the law currently allows. “[M]y personal opinion is that that information should be made available for all firms investing capital for the state or the pension funds under its control,” Bowles said.
State Attorney General Roy Cooper has issued an opinion upholding the trade secrets disclosure exemption.
State Rep. Stephen Ross, R-Alamance, also defends Cowell’s nondisclosure of fund managers’ information based on trade secrets grounds, especially in the alternative investments realm that gives rise to most of the secrecy complaints.
“It’s a very, very competitive world out there” with enormous dependence on proprietary information to cobble delicate deals together, said Ross, vice president and investment officer for Wells Fargo Advisors.
“It’s critical to them that their competitors not know what they’re doing because they’re doing something that may be different with different institutions. So there are a lot of contracts that are entered into” involving confidential price negotiations, trading platforms, and software programs, Ross said.
If the state breaks the trade secrets confidentiality contract, the fund managers could pull out and leave the state without access to those alternatives as a necessary part of the investment mix, he said.
Dan E. Way (@danway_carolina) is an associate editor of Carolina Journal.