Gov. Steve Beshear wants State Auditor Crit Luallen to scrutinize investment practices at the Kentucky Retirement Systems.
In a letter this week to KRS Board Chairman Randy Overstreet, Beshear suggested an outside audit to delve into the nearly $13 million in fees paid since 2004 to "placement agents," the middlemen who bring private investment deals to the KRS, a public agency that provides benefits to state and county retirees.
The KRS released an internal audit of placement agents on Aug. 12 that disclosed the names of placement agents and their fees but identified no serious problems. The agents' fees are paid by investment companies, not the KRS, although the KRS then pays management fees to the companies to cover their expenses.
The KRS Board of Trustees voted last week to reopen the audit and return it to a board committee for further review, in part because several trustees complained that they were unaware of the large sums collected by placement agents until the audit essentially was finished.
"It's the amounts we were seeing, individual fees in the millions of dollars," said KRS Trustee Christopher Tobe on Thursday. "I applaud the governor. I'm very happy he's getting involved."
Beshear said in his letter that Luallen would offer an independent assessment of the KRS. "I have become increasingly concerned about recent newspaper accounts regarding activities and transactions at the KRS," Beshear said. "The auditor's office could conduct a thorough review of the KRS policies and make recommendations as needed for best practices to be implemented to strengthen and improve the oversight and operations of KRS."
Overstreet on Thursday declined to comment, saying he was aware of Beshear's letter but had not read it.
"I'm very confident there are no improprieties," Overstreet said.
In a statement, Luallen said she will await a response from the KRS board.
The KRS internal audit revealed a previously existing relationship between placement agent Glen Sergeon, who made nearly $6 million in seven separate Kentucky pension deals, and Adam Tosh, who resigned last month as the KRS chief investment officer.
Sergeon and Tosh worked together several years ago on market strategies in Pennsylvania, when Sergeon was with Merrill Lynch and Tosh worked for that state's pension fund. Sergeon came under scrutiny in the audit because he so frequently surfaced as a placement agent, more than anyone else.
The audit report recommended that KRS investment staff disclose all of their connections with placement agents.
"Due to this prior working relationship and the continuous use of Mr. Sergeon, there could be a perceived appearance of preferential treatment," the audit report said.
However, a review of Sergeon and the other placement agents — including a study of their campaign donations — found no other connections between any of them and KRS or Kentucky elected officials, according to the audit report.
Placement agents with personal or political connections led to recent scandals involving New York and California's state pension funds. Prosecutors in those states allege that insiders sometimes improperly kicked pension business to certain companies based on campaign donations or other favors.