Experts React to Call for SEC Investigation Into RI Pension Fund
Friday, October 18, 2013
Former SEC investigator and Forbes columnist Edward Siedle released Thursday the findings of his months-long investigation into the Employees' Retirement System of Rhode Island (ERSRI) -- and made a call for the U.S. Securities and Exchange Commission (SEC) to now look into the dealings of the state.
Specifically, Siedle says that the SEC should "investigate ERSRI’s failure to disclose skyrocketing investment expenses, questions surrounding ERSRI’s Point Judith venture investment, and ERSRI investment consultant conflicts (and) payments from money managers."
Matt Taibbi, who recently wrote a scathing indictment of the hedge fund industry -- and Rhode Island's reliance on it in "Looting the Pension Funds" for Rolling Stone magazine, told GoLocal, "This is a pretty damning report. It goes into areas that are far uglier that the stuff we wrote about."
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTTaibbi: Hedge Funds Create "A Whole New Class of Insiders"
What is emerging as one of the biggest battles over billions of dollars in public pension investments across the country is playing out -- real time -- in Rhode Island
The main findings of Siedle's report released Thursday allege that ERSRI "secretly agreed to permit hedge fund managers to keep the state pension in the dark regarding how its assets are being invested; to grant mystery hedge fund investors a license to steal, or profit at its expense using inside information; and to engage in potentially illegal nondisclosure practices."
"I think the obvious conclusion from the report should be a warning signal -- not just in Rhode Island -- but anyone, anywhere as to the possibilities of manipulation with the pension systems," said Taibbi.
"One thing becomes immediately obvious when you start learning about state pension funds -- every one of these transactions creates a whole new class of insiders...and it's not clear to me there's adequate disclosure of that," Taibbi continued. "Even outside RI, I've encountered stories where people have traded ahead of movements of state pension funds. There's so much money to be made off this information -- forget the fees."
Report-author Siedle told GoLocal following the report's release that he thought a federal investigation could in fact stem from his findings. "I think the chances are very good for the SEC -- especially looking at these "mystery" investors who are benefitting and not being disclosed," said Siedle.
Former union head Steven Day, who was at Thursday's press conference at AFSCME 94 headquarters, told GoLocal, "I'm angered they're wasting taxpayers money...I'm angered they're hurting people who trusted public office."
"I'm not under any gag order with federal mediators," said Day, referring to the pension reform lawsuit currently pending before the state. "If they find out they've been lied to, that whole mediation may be tainted."
National -- and Local -- Reactions to Report
The report, which took three months to conduct -- was met to mixed reactions both locally and nationally.
"There is a curious mix of disturbing facts and sensationalized headlines in this report. It is clear there has been a lack of transparency in the state pension and a startling rise in investment fees. Those are issues for voters to judge in the upcoming election," said Darrell West, Director at the Washington DC-based Brookings Institute and former Director of Brown's Taubman Center for Public Policy.
West continued, however, "I was not persuaded that the Treasurer's behavior constitutes a license to steal and the basis for an SEC investigation. The authors would have been better served by sticking to the facts and letting others judge the seriousness of the behavior."
URI Distinguished Professor of Business Edward Mazze thought that the as far as the SEC is concerned, "They have more important things to investigate."
"Siedle's report is a "war" document prepared for AFSCME. There is no information in the 100+ pages that has not appeared before in publications or news conferences," said Mazze.
He continued, "In the report, there are four recurring themes. First, communications - give technical information to everyone whether or not they understand it or can use it. Second, transparency - open your books so that competitive information is not protected. Third, if you have a background in the finance industry you should not work in any activity that involves money. And fourth, if the first three things do not work - call the SEC."
"The report leaves out two of the the most important things in managing pension funds - spreading the risks and getting good returns on your investments," said Mazze. "A 50/50 stock and bond portfolio may do better than hedge funds but an equal split of hedge funds, stocks and bonds may do even better. There have been many times where hedge funds significantly outperformed traditional asset classes. Every investment instrument has its risks, and the risks vary depending on economic events.
Former Director of Administration Gary Sasse, however, thought that the "labor sponsored Siedle report raises some very serious questions about the General Treasurer’s transparency in managing the State pension system."
"I would hope that the Treasurer will respond to the finding in a comprehensive, direct and transparent manner. I have no way of knowing if the if the Siedle report is accurate and fair. Thus I will withhold any judgment until hearing from all parties," said Sasse.
He continued, "As the federal shutdown showed each side claimed the other was making the fiscal of the united States a political football. As we move into the election season there will be the inevitable calls that critical public policy questions should not evolve into political footballs. This is not either practical or possible in our democratic system, we can’t take politics out of politics."
"In Rhode Island , the most recent example of this was the call by the General Treasurer that management of the pension system should not be made a political football. Of course the Treasurer is correct. Investment decisions should be based upon the best available evidence , including transparency with regard to the performance of money managers," said Sasse. "Now the Siedle report challenges the stewardship of the Treasurer and there are two very conflicting views. Hopefully ,the public will gain from a complete airing of the differences."
"Keep in mind that informed investors have not always agreed on the future wisdom of current investment decisions, and there is nothing inherently wrong with political debates on how the people’s money is being managed. History is replete with very smart people whom both profited and lost on the stock market , as well as, with alternative investment choices. Therefore, when public monies are invested it is both natural and appropriate for investment decisions and practices to become part of the political discourse. When public funds are in question the people are best served by erring on the side of open government."
General Treasurer Responds
“This is clearly another political propaganda piece aimed at discrediting the Treasurer and the state’s pension reforms," said Treasury spokesperson Joy Fox. "None of this innuendo-filled report presented today seems new or different from the claims made in the past by Ted Siedle, who is being paid by AFSCME."
Fox continued, “The biggest innuendo is the false accusation that the Treasurer is using her position to enrich herself or that the state pension fund is not well-managed. These false personal and political attacks are red herrings intended to undermine pension reform."
“The Treasurer is proud of the work of the General Assembly did to provide retirement security for hardworking public employees and retirees. She also stands by the State Investment Commission strategy of maintaining strong long term returns, while working to minimize risk, by diversifying the portfolio.
“In 2011, Rhode Island had a choice. It could have done nothing and been dishonest about its problem. Instead, Rhode Island leaders came together, courageously put politics aside, and made the tough decision to protect the retirements of hard working public employees and retirees. Critics of the reform who cannot accept the math that the pension system was in crisis are like the climate change deniers who dispute basic scientific facts.
“The hypocrisy of this political attack is overwhelming. The City of Providence, the state’s second largest public pension fund has also suspended cost-of-living-adjustments, has a higher percentage of its pension fund invested in hedge funds and publishes less information than the state about the fees, investment portfolio, and investment commission actions.
“Despite all this, Ted Siedle is not being paid tens of thousands of dollars to criticize the City of Providence’s fund. The reason for this is clear: this isn’t about investment strategies, it’s about attacking the Treasurer and pension reform.”
“It is time to stop using pensions as a political football and instead put the best interests of our valuable state employees and teachers first. The political temptation is to go backwards, but let's move forward to avoid hurting people, just as they were hurt in Central Falls when pension checks were cut in half."
At the press conference on Thursday, AFSCME's Michael Downey said, "We want to make sure that this isn't a "political football" -- we want to make sure the fund is sound."
Related Slideshow: Timeline - Rhode Island Pension Reform
GoLocalProv breaks down the sequence of events that have played out during Rhode Island's State Employee Pension Fund reform.
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