Cayman Island hedge fund ruled “very doubtfully solvent”
Looks like the Louisiana Firefighters’ Retirement System, the Municipal Employees’ Retirement System and the New Orleans Firefighters’ Pension and Relief Fund may have lost almost $100 million that the three public funds invested in a New York hedge fund run by Fletcher Asset Management. A judge in the Cayman Islands, where the fund is registered, ruled recently that the flagship fund was “very doubtfully solvent” and should be liquidated.
In 2008, the three pensions invested a combined $100 million in Fletcher, which promised a guaranteed 12 percent return. If the fund returned less than 12%, an unnamed financial backer would make up the difference. How could three public funds have fallen for a preposterous investment scheme involving a 12% guaranteed return backed by a mystery investor? The investment consultant to the three funds, Consulting Services Group recommended it.
In 2006, a review conducted by a firm on behalf of the Shelby County, Tennessee retirement system investigated conflicts of interest and undisclosed financial arrangements involving this firm which served as the investment consultant to the fund. As the firm warned the County, the pension relied upon an investment consultant who was subject to myriad conflicts of interest for objective advice regarding management of its assets. As a result of the recommendation of the investment consultant, the pension fund had $135 million or approximately 15% of its assets invested with over 120 largely unregulated high-risk money managers scattered throughout the world whose identities, securities holdings, trading costs and custodians were unknown. The report was not well received and the County stayed with Consulting Services Group.
Consulting Services Group was censured in 2007 by the SEC, and under a 2009 settlement with the Department of Labor, the firm repaid $278,000 to private pension plans for not providing timely commission rebates between 2002 and 2006. All of this information was publicly available had the Louisiana pensions done an even cursory due diligence of their investment consultant.
According to the Times Picayune, last July, when questions began swirling about the bizarre Fletcher investment, officials at the three pension funds announced that they had assembled experts to review the hedge fund’s financial statements. In a joint statement July 28, officials with the three Louisiana pension funds said they believed the situation might not be as dire as they initially thought. According to these public fund officials, although a review was ongoing, early reports suggested Fletcher had enough assets to cover their $100 million investment and more than $40 million in profit. The chairman of the Firefighters’ Retirement System was quoted as saying that if the preliminary investigation into the hedge fund’s assets holds true, the deal will remain “our best investment since I’ve been on the board … Normally, we don’t like to make a hasty decision, but in this particular case, the hasty decision paid off.”
It’s all too familiar: Public pensions doing damage control — defending themselves by withholding from the public information about their suspect investments and irresponsibly issuing misleading performance and other information regarding the investments at issue.
This time the public pensions’ misrepresentations in the bayou bit ‘em in the derriere in the Caymans.
The Cayman judge noted that the arguments the pensions made in support of their petition for liquidation were in “stark contrast to their own earlier public acknowledgement in the Times Picayune” that the hedge fund had sufficient assets to satisfy redemptions. Gotcha.
Public pensions have historically been successful in hiding their blunders. Deny and delay telling the painful truth has usually worked for them. By the time the losses are acknowledged, the public has moved on to more interesting matters than pensions. Today and for the foreseeable future, for demographic and economic reasons, all eyes will be on the nation’s precarious public funds. If you lie to the public today, you may just get caught.
