Franklin County

Audit examines role of middlemen in state pension investment deals

FRANKFORT — Companies doing business with the state pension system have paid nearly $13 million in fees since 2004 to "placement agents," middlemen who bring private investment deals to the pension program, according to an internal audit released Thursday.

Although highly paid placement agents with political connections have led to recent scandals involving New York and California's state pension funds, officials at the Kentucky Retirement Systems, or KRS, said there is no sign of "pay-to-play" problems here.

But the 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 chief investment officer for KRS.

Sergeon and Tosh worked together years ago on market strategies when Sergeon was with Merrill Lynch and Tosh handled investments for Pennsylvania's pension fund. During an interview with KRS staff as part of the audit, Sergeon disclosed their previous relationship.

"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.

Sergeon came under particular scrutiny in the audit because he so frequently surfaces as a placement agent in Kentucky pension deals, KRS officials said.

Placement agents are third-party operators, employed neither by the pension system nor the investment company. Their fees are paid by the investment company, which then gets millions of dollars in continuing management fees from the pension system.

The report recommended that KRS investment staff should disclose all of their connections with placement agents. The KRS enacted a policy for placement agents last year requiring disclosure of their names and fees, as well as any payments they make to current or former KRS or Kentucky elected officials.

State pension deals must be transparent, but following a thorough examination, no evidence of wrongdoing was found, KRS executive director Mike Burnside said. Tosh quit the KRS to accept a job in the private sector, not because of anything disclosed in the audit, Burnside said.

Tosh, now a managing director at Rogerscasey investment firm in Darien, Conn, said Thursday that he worked with Sergeon on a limited basis in Pennsylvania. Their only face-to-face encounter was a three-hour meeting in 2004, Tosh said. He didn't see Sergeon again until he took the Kentucky job, he said.

"He called on us like any other salesman," Tosh said. "He brought us a lot of good deals."

Sergeon, who lives in New York, declined to comment on the audit report Thursday, other than to describe his relationship with Tosh as strictly professional.

"We were not friends," Sergeon said.

The audit raised two other points about Sergeon.

He has provided services in Kentucky pension deals under several different business names, including Bleecker Street Partners, Cazanave and Co. and Diamond Edge Capital Partners. There is no evidence this is improper, the audit report said, but KRS financial advisers described it as "an unusual practice."

One of Sergeon's firms, Diamond Edge, has been caught up in New York's controversy over placement agents whose large political donations might give them unique access to state investment officials.

Diamond Edge partner Marvin Rosen — whom the audit lists as sharing a $750,000 fee with Sergeon on a 2008 KRS deal — is a major national Democratic Party fund-raiser and a close ally of former President Bill Clinton. Sergeon, too, has contributed to Democratic political campaigns, although none in Kentucky, according to campaign-finance records.

Also, Sergeon last year was paid a $780,000 placement fee that amounted to 3 percent of a $26 million investment deal he helped broker with KRS, according to the audit.

KRS officials said their financial advisers consider any placement fee of more than 2 percent to be "unusual." But KRS has no control over the size of placement fees because it's not directly paying them, the audit report concluded.

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