Transparency Denied: New Treasurer Censors Hedge Fund Reports
Thursday, March 12, 2015
New state Treasurer Seth Magaziner has refused to release uncensored reports on more than a dozen hedge funds in which the state pension fund has invested, despite a campaign commitment to greater transparency than his predecessor, Governor Gina Raimondo.
In a letter to GoLocalProv, Magaziner’s office said that information considered confidential or trade secrets had been redacted. In a statement, spokeswoman Shana Autiello said that the office was relying on the Attorney General Peter Kilmartin’s decision in 2013 that the state public records law did not require then-Treasurer Raimondo to release uncensored copies of the reports to the Providence Journal.
When he was running for office, Magaziner promised greater transparency. He made a point of mentioning it on the Issues section on his Web site and, elaborated on it in one media interview, saying he would see what he could do to release more information about the hedge funds and explore the possibility of re-negotiating the agreements that limited what state officials could make public.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLAST“It’s very disappointing that he hasn’t reversed the old treasurer’s decision, consistent with his campaign promise,” said Edward Siedle, a Forbes.com contributor who conducted his own investigation into the state pension fund’s lack of transparency and investment decisions under Raimondo. Siedle said that Magaziner had opted to continue Raimondo’s “flawed secrecy policy.”
“It appears the new treasurer is not going to be more transparent than the last treasurer,” Siedle said. All of which, he added, begs the question as to who is benefiting, Wall Street or the public employees whose retirement savings are being invested.
“Whose interests [is] he seeking to protect?” Siedle concluded.
Open government groups protest censorship
Soon after taking office, Raimondo implemented a deliberate strategy of moving what ended up being $1 billion in pension money into hedge funds. The move was controversial—not only because of the high fees charged by hedge fund managers, but also because the returns ended up underperforming the market. In fiscal year 2012, the pension fund lost $200 million under the new investment strategy.
The Due Diligence reports are important because they are the documents that the State Investment Commission, under Raimondo’s leadership, used to evaluate the hedge funds before making investment decisions.
The reports contain reams of vital information including: the structure and leadership of the funds, staff compensation, the extent to which they are deemed in compliance with federal regulations, how they make investment decisions and protect their investors, and how the fund is valued. The reports were prepared by Cliffwater, a third-party investment adviser that is under contract with the state. (Cliffwater CEO Stephen Nesbitt did not respond to a request for comment.)
In 2013, the Providence Journal requested copies of the Due Diligence reports for 19 hedge funds. (In all, there were 38 reports—two for each fund. One covers investments; the other fund operations.) When her office refused to release the complete reports, a coalition of open groups sent a protest letter, saying the state public records law (known by the acronym APRA) had not been properly applied.
Leaders of two of those groups this week told GoLocalProv they were disappointed the lack of transparency is continuing.
“The ACLU continues to have many of the same transparency concerns that we, along with others, raised with then-General Treasurer Raimondo about this issue two years ago,” said Steve Brown, executive director of the ACLU of Rhode Island. “Some of the redactions may very well include information properly deemed confidential under APRA. However, when dealing with the investment of taxpayer money, public agencies should always err on the side of disclosure, not secrecy, if there is any doubt.”
“It’s disappointing, but not surprising, that the Treasurer’s office would not release the reports. Given that these are the same documents requested under the earlier administration, whose redaction was upheld on appeal to the Attorney General, a change in position would be surprising. We hope that going forward the new Treasurer will only agree to work with firms who do not insist on redacting information that is clearly in the public’s interest to know,” said John Marion, executive director of Common Cause Rhode Island.
Secret meetings and hidden staff
Magaziner’s spokeswoman said that his office was contractually bound to not release the information. “It is the position of this office that previous contracts must be honored. Treasurer Magaziner will continue to be as transparent as possible without undercutting the ability of funds to deliver the best possible returns for our state,” Autiello said.
She did not say whether Magazine had attempted to re-negotiate the agreements or explored the legal and financial ramifications of breaking them—possibilities he had aired while on the campaign trail.
Invoking the contracts, however, is likely not to satisfy open government advocates. In their August 7, 2013 letter to Raimondo they declared that, “we firmly reject the view that a public body has the authority to contractually waive the statutory rights that the General Assembly has provided the public under APRA. Allowing agencies to do so would open a gaping hole in the Act and frustrate its core purpose. If certain records are exempt from disclosure, it is because APRA, not a contract, makes them so.” (Besides the ACLU and Common Cause, two other signatory groups were the Rhode Island Press Association and the League of Women Voters.)
A GoLocalProv review of the reports shows every single one has numerous redactions. In some cases nearly whole pages are blacked out. And, it is often difficult to tell why the information would be considered confidential or fall under the category of trade secrets. In every report the scores that Cliffwater gave the hedge funds—on everything from their compliance with federal regulations to their business management—are redacted.
On a number of the reports some employee names, positions, and backgrounds are provided while some of the same information for their coworkers is blacked out. One report redacted the dates and locations of meetings between Cliffwater representatives and officials at the hedge fund they were evaluating. Another report even redacted some of the information in a glossary of terms.
Redactions, including who made them, questioned
“[A] few of the particular redactions that have been made—such as the apparent random deletion of the names of a handful of key fund employees—are highly suspect, and can serve only to raise questions about the validity of the redaction process as a whole,” said Brown.
As surprising as some of the redactions are, so is their inconsistency. While one report contains no unredacted information on meetings others at least disclose the date and locations if not the names of the participants. Employee names are withheld, but not in any consistent pattern.
When asked whether hedge funds had made the redactions themselves, Autiello would only say that the Treasurer’s office had stuck to its practice of making “final redactions.” In one report it was apparent that there had been two rounds of redactions—one with made on the original document with a marker, the other electronically.
The possibility that hedge fund managers made decisions on what information would be made public has alarmed open government advocates.
“We are aware of nothing in the Access to Public Records Act that authorizes an agency to delegate to private entities the decision as to what records are available to the public under the Act,” their 2013 letter states. “APRA would be seriously undermined if any record submitted by a private party to a government agency [was] subject to withholding based on the third party’s interpretation of the open records law and its view of what should be disclosed to the public.”
Autiello insisted that Magaziner remained committed to transparency. “Treasurer Magaziner will always be reviewing best practices to make sure we are as transparent as possible, compliant with the law and never in breach of our fiduciary duty,” she said.
Magaziner’s office did not provide any explanations for why some seemingly non-confidential information, such as employee names, was withheld, but one local investment professional said there could be a legitimate reason. “Certain employees and their compensation should not be revealed due to poaching,” said Mike Riley, the managing member of Coastal Management Group, LLC and also the manager of a small hedge fund, Narragansett Multi-Strategy Fund. (No state pension money is in the fund, according to Riley.)
Riley, who is also a GoLocalProv MINDSETTER, was asked if, in his opinion, the information redacted in the reports was indeed confidential or pertained to trade secrets. He said it was. In particular, after reviewing one set of reports, for Ascend Capital, he said the redacted sections contained information about how the firm makes its money.
Nonetheless, he said the reports for Ascend Capital still allowed someone to determine their fee structure—information which should be public, according to Riley. “I’m absolutely in favor of as much transparency as possible. Fees are absolutely a necessary disclosure,” Riley said. “But I do side with the hedge funds on some of the proprietary information.”
“In summary, the reports—even in redacted form—are thorough and tell me enough to make an investment decision and-or opine about the appropriateness of the investment and the level of fees,” Riley said.
Video Wall courtesy of Harmonica Pete/ flickr
Related Slideshow: Hedge Fund Reports Censored
Below are excerpts of the redacted reports on hedge funds the state Treasurer provided to GoLocalProv. The documents are known as Due Diligence reports. They are used to help the State Investment Commission evaluate hedge funds before making decisions about investments. There are two types of the reports: one on the fund’s investments and one on the fund’s operations. With each excerpt, is a brief description of the information it contains.
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