Franklin County

Kentucky Retirement Systems to seek state audit of placement agents

FRANKFORT — The Kentucky Retirement Systems will ask state Auditor Crit Luallen to review its use of placement agents, the well-connected middlemen who have collected nearly $15 million in fees since 2004.

The KRS Board of Trustees audit committee on Wednesday voted to ask Luallen to conduct an independent audit, a move that was requested last week by Gov. Steve Beshear. Later, KRS board chairman Randy Overstreet said the full board would take up the audit committee's recommendation and that he would personally meet with Luallen in the near future to request her audit.

Board members said the credibility of KRS — which provides benefits to state and county retirees — suffered because of public disclosure of the large payments to placement agents, especially while the $12.5 billion fund is struggling to keep up with its pension and health care commitments.

"The numbers we're talking about don't wash with someone getting a $900 monthly pension check," said KRS board member Robert Wilcher.

KRS released an internal audit of placement agents on Aug. 12 that disclosed agents' names and fees but identified no serious problems, such as financial or political connections to Kentucky officials, which has led to controversies with placement agents at other state pension systems.

The internal audit found nearly $13 million in fees paid as of February; since then, $2 million in additional fees have been uncovered by KRS auditors.

Placement agents are paid by private investment funds to help them sell their products to KRS, not by KRS directly, although KRS then pays fees to the investment funds to cover their expenses.

The KRS board two weeks ago voted to reopen the internal audit for further review after several trustees complained that they were unaware of the large fees until it was reported in the news media. KRS employees held the payment information for six months as they finished their audit.

"When we later learned the amount of the fees, they were big numbers that I think would have caused us to ask more questions," said KRS board member Jennifer Elliott.

KRS should prohibit placement agents from participating in its investment deals, said KRS board member Christopher Tobe, a Louisville-based investment adviser to other pension funds and a former investment specialist at the state auditor's office.

KRS pays its own staff members and its private investment managers to find good investment opportunities, Tobe said. There don't need to be middlemen collecting million-dollar paychecks simply for introducing people at a meeting, which is one reason the Securities and Exchange Commission has considered banning them, he said.

"They're parasites," Tobe said. "Placement agents all around the country have been seen as political figures and not adding value to the investment side."

The KRS audit committee quizzed consultants from its private investment managers Wednesday about the need for placement agents. The consultants said placement agents can be useful for promoting small investment funds with good returns that otherwise might be overlooked. But the fees seem "rather enormous," the consultants said.

The KRS internal audit revealed a previously existing relationship between New York placement agent Glen Sergeon, who made nearly $6 million from Kentucky pension deals, and Adam Tosh, who resigned in July as KRS' chief investment officer.

During the audit process this year, Sergeon and Tosh disclosed that they knew each other because they had teamed up several years ago on market strategies in Pennsylvania, when Tosh worked for that state's pension fund. In the future, the auditors wrote in their report, KRS investment staff should announce their relationships with placement agents before deals are enacted, not afterward.

"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, on Wednesday, KRS general counsel Schuyler Olt said he interviewed Sergeon and did a computer database check of Sergeon and other placement agents — including their campaign donations — and found no other connections between them and KRS or Kentucky elected officials.

Several KRS trustees said they worry that skilled placement agents might be steering KRS into bad investment deals in order to pocket huge fees.

For example, Tobe said, Sergeon was paid $2 million after KRS last year agreed to invest $200 million in the Arrowhawk Durable Capital Fund, a new hedge fund in Darien, Conn. Arrowhawk Capital Partners, which paid Sergeon his fee, has seen some shaky returns on the fund this year, Tobe said.

Consultants for Strategic Investment Solutions Inc., the KRS investment manager that helped advise on the Arrowhawk deal, told KRS trustees that they didn't know Sergeon was involved until after the deal was signed. Arrowhawk had its own marketing executive to handle promotions, which would seem to make a placement agent unnecessary, the consultants said.

Sergeon has declined to comment.

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