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Caught in the middle

Capital Goods: February 2014

Caught in the middle
By Scott Mooneyham


When a 131-page report hints at influence peddling in deals involving hundreds of millions of dollars controlled by the state, you might expect it to cause quite a stir. That it didn’t might be because a few million here or there is chump change when talking about investments in the tens of billions. Scandals involving middlemen-brokered investments for public-employee pension funds keep popping up. The middlemen, known as placement agents, apparently posed the same problems for North Carolina’s $80 billion fund as they have elsewhere.

In theory, smaller investment firms hire placement agents to interest big institutional investors in their funds. The deals that have attracted attention haven’t been so straightforward. They involve the politically connected, their hiring sometimes dictated or suggested by those with decision-making authority for a pension fund. In the worst cases, such as the one that sent former New York controller Alan Hevesi to prison in 2011, the placement agent becomes the known broker that investment firms have to work through to get a piece of a pension fund’s business. In other words, pay-to-play politics. A kickback scheme.

Nothing smells quite that bad in North Carolina. The report does, however, suggest that favors and friends played a role in nine deals from 2002 to 2008, during Richard Moore’s two terms as state treasurer. The report was released late last year by the office of State Treasurer Janet Cowell — like Moore, a Democrat — but is based on a 2½-year review led by the state Department of Justice and an outside legal firm. Some findings were old news, such as the favors offered to the state’s former chief investment officer, Patricia Gerrick, whom Cowell fired in 2009. Others were new — and tantalizing. There was a $3,800 case of wine given to a member of the state’s investment advisory group by the managing partner of a private-equity fund that had just won a $30 million commitment from the pension fund. There was a contract employee of the treasurer’s office who had a relative working as a placement agent. There were two people connected to Moore who served as placement agents and a meeting in the Hamptons between Moore and the head of a firm that hired one of them.

Moore told the Raleigh News & Observer he was never asked about any of this. He called the review “outlandish and unprofessional” and said it was filled with inaccuracies. That case of wine apparently was not among those inaccuracies. The recipient, a venture capitalist named Steve Nelson, told me he did recall receiving some wine but had not asked for it, was not a placement agent and had merely made a suggestion regarding the firm. By the way, the contract employee referenced in the report no longer works at the treasurer’s office.

It’s important to note that the review was not a criminal investigation. The report points out that it was conducted without subpoena power and that its findings might not be “complete or accurate.” It states, “Given these limitations, we note with great emphasis that this report draws no conclusions about whether any events violated any laws or State policies.” It did, however, cause eight investment firms to agree to pay $15 million in refunds or future fee discounts to the pension fund.

Cowell put measures in place a few years ago to prevent conflicts of interest involving placement agents, including requiring investment managers to disclose when they have used them and the fees paid to them. The report calls for more action. It includes recommendations that placement agents register as lobbyists and that investment managers disclose existing relationships that might represent conflicts
of interest. It would also have the treasurer do something both Cowell and Moore have resisted: remove themselves as sole fiduciary over the pension fund in favor of an investment committee.

In response to the report, Cowell created a commission to examine the governance structure for pension-fund investments. But don’t expect middlemen to be squeezed out. She estimates as many as half of the transactions involve placement agents, though the number is declining. Eliminating them, she says, would hurt small and minority-owned investment firms.

Maybe she is right. But when billions of dollars are involved and pennies on the dollar still add up to millions, unscrupulous types will flutter around the bright light of state pension funds. All that reporting of who is doing what for whom won’t mean a thing unless the people to whom the money actually belongs — the state pensioners — know what’s going on.

Scott Mooneyham is editor of The Insider, Email him at


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