Secret Agent

March 12th, 2012  |  Published in Uncategorized

Secret Agent
Forbes, 05.04.11
Public pensions are $660 billion in the hole. Investment middleman Glen Sergeon illustrates how millions more are being lost to dubious dealings.

The battle over public pensions has recently led to walkouts, sleep-ins, tax hikes and layoffs of public employees as communities grapple with grim financial realities–including at least a $1.26 trillion shortfall in funds to pay for promised benefits (seeĀ “Mind the Gap”). One guy who doesn’t seem to be suffering is Glen Rodger Sergeon Jr.

Sergeon is a placement agent. His job is to convince officials at state and local pension funds to hand over slices of their $2.3 trillion in assets to his clients, who seek to manage them for a fee. In 2008 and 2009 Sergeon lined up such work with the $14.6 billion (assets) Kentucky Retirement System on behalf of seven money managers. One that paid Sergeon’s firm over $2 million was the Arrowhawk Durable Alpha Fund–an outfit that couldn’t have won over public officials with its track record because it was brand-new. Another startup, Crestview Partners II, paid Sergeon’s company $1.1 million.

Sergeon, contacted by phone, politely declared, “I don’t talk to reporters,” and hung up.

Such brush-offs are unlikely to end the questions about the $6 million that money managers paid Sergeon for lining up business with Kentucky’s pension fund. The figure represents nearly half the $13 million that investment funds paid placement agents for landing business with Kentucky between 2004 and 2009, according to a Kentucky auditor’s report released last summer.

Just what forms of persuasion Sergeon and the other agents apply has become a hot topic lately. Placement agents are used at one time or another by more than 90% of public funds, according to Edward Siedle, a former Securities & Exchange Commission attorney who runs Benchmark Financial Services (and contributes to Forbes.com) in Ocean Ridge, Fla.

Agents say they provide valuable screening for public funds that lack the resources to do the job. Critics charge they’re glorified bagmen in a pay-to-play world in which public officials hand assets to money managers willing to contribute to their political campaigns or otherwise enrich them.

“Regulators and law enforcement around the country have concluded that many arrangements involving placement agents and public funds amount to little more than influence peddling,” says Siedle.

Evidence of such activity has led to criminal convictions and new restrictions on placement agents. Yet the game goes on. In Kentucky, where no one has been accused of wrongdoing, even the state fund’s trustees were apparently kept in the dark for years about the $13 million in placement agent payments until last year’s release of the state auditor’s report. In typical fashion, Kentucky’s nine trustees are a mix of employee representatives–whose primary focus is benefits rather than investments–and political appointees. For several years, in fact, only one trustee, Christopher Tobe, had a background in investments.

In April the Kentucky board fired longtime director Michael Burnside amid concerns that he’d withheld information on placement agents from trustees. The state attorney general determined around the same time that Burnside had violated open-records laws by refusing to divulge staff salaries. Burnside did not respond to requests for comment. The SEC, meanwhile, has inquired into Kentucky’s use of placement agents, and the state auditor has launched a new investigation.

“Public pensions need placement agents like dogs need ticks,” says Kentucky trustee Tobe. “There’s no reason to pay agents when fund managers have their own salespeople anyway.”

Officials in a number of states appear to agree. California began in January requiring placement agents to register as lobbyists, attend ethics training and forsake finder’s fees from money managers–a move that has prompted some to declare they’ll leave the state. California’s move follows a scandal in which former directors of the $231 billion (assets) California Public Employees’ Retirement System earned $125 million as placement agents. They did so in part by enriching public officials with under-the-table payments, jobs, a Lake Tahoe condo and by hosting a wedding, a Calpers report states. Some former directors have denied wrongdoing.

New Mexico’s fund is the subject of SEC and FBI pay-to-play probes. State officials are seeking to recover potentially tens of millions of dollars lost to kickback schemes. In Illinois the Teachers’ Retirement System banned placement agents after three middlemen pleaded guilty in an extortion scheme that steered money from investment managers to public officials.

New York State banned placement agents in 2009 after then attorney general Andrew Cuomo discovered them arranging for money managers to receive state work in exchange for bribes to politicians. The case resulted in $170 million in fines and eight criminal guilty pleas. In April former pension boss and state comptroller Alan Hevesi was sentenced to one to four years in prison for accepting $1 million in gifts for committing $250 million to Markstone Capital Partners, LP.

“Gifts, favors and campaign contributions are not a legitimate basis for government contracts,” Cuomo said. “Lobbyists whose stock-in-trade is pay-to-play have no business appearing before government.”

The ability of agents like Sergeon to continue operating says a lot about the porous nature of the pay-to-play crackdown. A New Yorker who lives in a penthouse apartment on Greenwich Village’s Bleecker Street, Sergeon appears to have entered the securities business around 1990 via Citibank, where he met H. Carl McCall. After McCall was elected state comptroller three years later, he appointed Sergeon as a trustee of the New York State Teachers’ Retirement System. Sergeon later moved to Merrill Lynch, where he sold investment products to pension funds.

McCall, Hevesi’s immediate predecessor as comptroller, had his own political career derailed in part by a controversy in which he was accused of using his oversight of the state pension fund to solicit campaign contributions and jobs for friends and relatives. Following an election defeat McCall set up his own firm, Convent Capital, in 2005 and began doing business with the state. A spokesman for McCall tells FORBES that the firm “is not a placement agency and [McCall] has not served as a placement agent.”

Diamond Edge Capital Partners is another firm that was paid–$6.8 million–by money managers for lining up work with New York. In 2008 Sergeon joined Diamond Edge, where he teamed up with Marvin Rosen, a company partner and the former Bill Clinton fundraiser who arranged Lincoln Bedroom sleepovers for big donors. Later that year Sergeon landed Diamond Edge its first business with Kentucky.

Sergeon himself appears to have segued into the state via Adam Tosh. The two formerly had done business together when Sergeon was a Merrill salesman and Tosh an investment staffer at the Pennsylvania State Employees Retirement System. Tosh left his state job for MDL Capital, a minority-owned money management firm whose principal, Mark D. Lay, was sentenced in 2008 to 12 years in prison for his role in an investment scam. Tosh, who now works at investment advisory Rogerscasey, did not respond to requests for comment. He has previously stated that Lay’s crimes occurred prior to his own arrival at MDL. Tosh has also said that in Kentucky he relied on Sergeon’s advice based on his solid track record.

Suspicious about the Kentucky fund’s management, trustee Tobe began pressing for information on use of placement agents in April 2009. Tobe says that in August of that year he was forced off the investment committee by Randy J. Overstreet, who’d chaired the board for 14 years; the following month Sergeon placed $200 million with Arrowhawk.

Investment chief Tosh resigned three weeks before it was revealed last year that Arrowhawk and other money managers had paid Sergeon millions; Tobe was later reinstated to the investment committee. Last month Overstreet was ousted from his position as fund-board chairman. He did not respond to requests for comment.

Sergeon, meanwhile, has kept busy beyond the Bluegrass State. Crestview Partners, the private equity firm that in 2008 paid his firm $1.1 million for arranging work in Kentucky, also landed a $100 million investment from North Carolina’s $72 billion (assets) pension fund the same year. Crestview denies working with Sergeon outside Kentucky but declined to say if it has worked with his employer, Diamond Edge.

The North Carolina treasurer’s office seems to keep as lax a grip on its public purse strings as Kentucky officials did. To educate fund fiduciaries, the SEC requires money managers that register with it to disclose use of placement agents and other conflicts of interest in a document known as an ADV II. Like many institutional funds, Crestview is not registered with the SEC or obliged to make such disclosures. The North Carolina treasurer’s office said in a written statement that it “obtains information about potential conflicts of interest prior to commitment.”

The year after North Carolina’s 2008 hiring of Crestview, Sergeon made a charitable donation of over $1,000 to the University of North Carolina Hospital in honor of Patricia Gerrick, the state’s chief investment officer. Gerrick was later fired from her post amid reports that she traveled abroad on trips funded by investment firms doing business with the state. She is currently a director of Busara Advisors along with Marx Cazenave II, founder of Cazenave & Co.–another firm that employed Sergeon in Kentucky. Gerrick did not respond to a request for comment made through Busara.

Disclosure is murky elsewhere, too. Arrowhawk, the firm that channeled $2 million to Sergeon for landing $200 million from Kentucky, also snagged $100 million from the San Joaquin County (Calif.) Employees’ Retirement Association. When FORBES contacted county officials seeking Arrowhawk’s disclosure form, the fund’s general counsel, Meg Jing, responded by stating that it is not registered with the SEC and that it does not produce a form.

Why, you might wonder, doesn’t the SEC follow New York’s lead and ban placement agents? It proposed as much in late 2009 but ran into fierce industry resistance. One agent leading that opposition was Park Hill, an outfit owned by Blackstone Group. (Park Hill itself received $2.35 million for lining up business in Kentucky–for Blackstone funds.) Blackstone’s billionaire founder, Stephen Schwarzman, personally sent a letter to the SEC opposing a placement agent ban.

The SEC settled for limiting investment advisers to paying placement fees to “regulated persons,” who are registered with the SEC and subject to pay-to-play restrictions. From July, money managers doing business with public funds will also have to issue ADV IIs.

“If the Commission determines that third party placement agents continue to inappropriately influence the selection of investment advisers for government clients–even under our enhanced rules–I expect that we would consider the imposition of a full ban on the use of these third parties,” said SEC Chairman Mary Schapiro.

So much for putting investors first.

Read the original story on Forbes.com

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Zack O'Malley Greenburg is a Forbes senior editor and author of the Jay-Z biography Empire State of Mind. His second book, Michael Jackson, Inc, will be released by Simon & Schuster's Atria imprint in June. Zack covers the business of music in The Beat Report at Forbes, where he's tackled topics from public pension fund scandals to Justin Bieber's career as a venture capitalist. He's also written for the Washington Post, Vibe, Sports Illustrated and McSweeney's; appeared as a guest speaker at Yale, Harvard, Georgetown and SXSW; and served as an expert source for BBC, NPR, MTV, VH1 & 60 Minutes. Full bio here.


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