Kentucky pension system invested $24 million in equity fund accused of stealing millions

jcheves@herald-leader.comJanuary 31, 2014 

FRANKFORT — Kentucky Retirement Systems, which provides retirement benefits for state and county employees, has more than $24 million invested in a private equity fund that was charged Thursday with stealing millions from investors.

The U.S. Securities and Exchange Commission issued civil charges against The Camelot Group of New York and its manager, Lawrence E. Penn III, and obtained an emergency court order to freeze their assets.

Penn, 43, secured capital commitments of about $120 million for his four-year-old fund, according to the SEC, making KRS one of the earliest and biggest investors.

The SEC alleges that Penn "concocted a sham due-diligence arrangement" to keep investor funds that were supposed to be spent for legitimate purposes, such as investigating potential investments made by The Camelot Group. At least $9.2 million was diverted improperly, according to the SEC.

"Penn held himself out as an ultra-sophisticated and well-connected investor in the private equity world," Andrew Calamari, director of the SEC's New York regional office, said in a prepared statement. "Behind the scenes, Penn disregarded his obligations to the fund's investors and treated their assets as his own personal and professional slush fund."

A call Friday to The Camelot Group's offices was not immediately returned.

KRS executive director William Thielen said Friday that the pension system is monitoring developments with its attorneys, but it's too early to say what happens next.

"We'll do everything we can do to get our money back if we believe our investment is at risk," Thielen said.

In 2009, KRS made a commitment to invest $26 million over several years to The Camelot Group, which was just getting organized. The pension system has invested "a little over $24 million so far," Thielen said. As of last July, KRS valued that investment at $28 million, but that's based on what The Camelot Group reported in its statements, he said.

"It's a small amount relative to our total asset base of $14 billion, $15 billion," Thielen said.

If the SEC's allegations are correct, KRS doesn't know how much of its money remains, said Chris Tobe, a Louisville investment manager and a former KRS trustee.

"Twenty-eight million is the value that Camelot told us, but there's been no independent verification," Tobe said. "It could be $2 million, it could be $20 million, nobody knows."

Tobe, a frequent critic of KRS management, said the case is another example of why public pension systems should avoid "placement agents" — third-party middlemen who are paid to introduce equity fund managers to large investors like KRS. State audits revealed that The Camelot Group paid $780,000 in fees to placement agent Glen Sergeon of New York to get the KRS commitment in 2009, Tobe said.

"They were getting $26 million of our money to do whatever they wanted with for four years, so it was a good deal for them, if not for us," Tobe said. "For us, basically we were convinced to seed a start-up firm with no track record, and now it's falling apart."

Thielen said that, to his knowledge, KRS has not invested in a deal involving placement agents in several years. He said he doesn't think it's fair to condemn the whole profession.

"You may have 100 placement agents that are fine and one who's a rotten apple," Thielen said. "You can't make a general statement."

John Cheves: (859) 231-3266. Twitter: @BGPolitics. Blog: Bluegrasspolitics.bloginky.com.

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