Pension360

The Miners Protection Act, federal legislation supported by Ohio senators Sherrod Brown and Rob Portman, is facing a rough road to passage despite bipartisan support, reportedly due to Senate Majority Leader Mitch McConnell’s opposition.

The measure, if approved, will shift federal money from the Abandoned Mine Land Fund to the 1974 United Mine Workers of America Pension Plan — which is deeply distressed — to help ensure the benefits for about 6, 500 retired mine coal workers.

From Trib Live:

Ohio’s two U.S. senators — Democrat Sherrod Brown and Republican Rob Portman — are among those pushing for a legislative fix that supporters say would protect the coal miners’ hard-earned benefits without costing taxpayers anything. The bill has broad bipartisan support, with Democrats and Republicans from Pennsylvania, Indiana and West Virginia leading an aggressive push to pass the measure before the end of the year.

But the bill faces at least one powerful foe in Congress: Senate Majority Leader Mitch McConnell, R-Ky., who portrays himself as a staunch defender of his home state’s coal industry.

“McConnell … has opposed this because he doesn’t like the United Mine Workers union… We could win this on a straight up-or-down vote,” the Ohio Democrat [said], but McConnell has blocked such a move.

A spokesperson for Senator McConnell said:

“Senator McConnell has been and remains committed to helping ensure the retirement security of our nation’s retirees, including coal miners,” [Robert] Steurer said in an emailed statement. “He appreciates the importance of this issue to many affected coal communities in Kentucky and around the country and continues to believe this issue deserves an open, transparent debate through regular order.”

But government affairs director of the mine workers union Phil Smith said time is running out. “If we don’t get new money into this pension plan through this legislation within the next 12 to 18 months, that fund will be past the point of no return,” he said.

CalSTRS CIO Chris Ailman joined CNBC this week to talk about the long-term impact of Brexit and the affect on the pension fund’s investment strategy — particularly its exposure to Europe.

Credit: CNBC video

Japan’s Government Pension Investment Fund is expected to announce about $50 billion in investment losses from the fiscal year ended March 31, 2016, according to a report from CNBC.

With $1.4 trillion in assets, GPIF is the world’s largest pension fund.

The loss comes as GPIF shifts to a more aggressive investment strategy, which includes higher allocations to domestic equities.

More from CNBC:

Portfolio losses for the Government Pension Investment Fund for the 12 months through March were between 5 trillion and 5.5 trillion yen, the person told Reuters on Friday, speaking on condition of anonymity as the results are not public.

The $1.4 trillion GPIF has taken a more aggressive investment stance in recent years, shifting towards stocks and away from low-yielding Japanese government bonds, in line with Prime Minister Shinzo Abe’s push to deploy more of Japan’s huge financial assets in riskier investments and boost economic activity.

The Nikkei stock average fell 13 percent last fiscal year.

The GPIF plans to announce the fiscal-year results on July 29, the source said. That is later than the usual early-month timing – and after a July 10 national election.

There was doubt as to whether Chicago Public Schools would make its annual pension contribution on time this year; however, with no time to spare, CPS indeed met the deadline for the $676 million contribution.

However, the big payment has left the school with just about a week’s worth of cash on hand.

More from Reuters:

The Chicago Public Schools met a Thursday deadline to complete a $676 million contribution to its teachers pension system, a school spokeswoman said.

The nation’s third-largest public school system had to fully tap an $870 million bank line of credit to make the payment, according to Emily Bittner, the spokeswoman.

With fiscal 2016 ending at midnight Thursday, Bittner said the district has about $83 million in cash, which is up from a projection of just $24 million CPS made after it sold $725 million of bonds in the U.S. municipal market in February.

She added that the $83 million cash on hand estimate represents less than a week of operating expenses for the district.

[…]

CPS received a potential $555 million revenue boost from the Illinois legislature on Thursday mainly for pensions that came out of marathon negotiations this week between Illinois Governor Bruce Rauner and legislative leaders.

“This agreement will place our schools on stronger financial ground so that our parents, our teachers, and our principals can focus on the fundamentals of our children’s academic success,” Chicago Mayor Rahm Emanuel told reporters.

New York Comptroller Thomas DiNapoli – the sole trustee overseeing New York state’s retirement system – has ordered staff of the $178 billion Common Fund to begin identifying companies in its portfolio who are boycotting Israel.

Once identified, the pension fund may restrict further investment in those companies or divest entirely.

New Jersey lawmakers pushed this week for a similar move from its state pension; New York Gov. Cuomo already signed an order barring the state from doing business with companies involved in the boycott.

More from the NY Daily News:

Companies that take part in an anti-Israel boycott campaign may find themselves boycotted by New York’s pension fund, the state controller warned Wednesday.

“Attempts to harm Israel’s economy can put our investments there at risk,” DiNapoli said. “We’re putting companies engaged in BDS activities on notice that there will be consequences if their anti-Israel activities expose our investments to financial harm.”

The campaign is meant to put economic pressure on Israel for its treatment of Palestine. But critics charge it is anti-Semitic and an attack on the legitimacy of Israel.

DiNapoli said any existing investment in a company taking part in the BDS movement will be reviewed and could ultimately be liquidated if the company does not change its ways.

Other companies taking part in BDS activity could be added to a restricted list that prohibits future investment, added DiNapoli, who visited Israel in November 2015.

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Brody Mullins of the Wall Street Journal reports, Teachers Union and Hedge Funds War Over Pension Billions:

Daniel Loeb, Paul Singer and dozens of other hedge-fund managers have poured millions of dollars into promoting charter schools in New York City and into groups that want to revamp pension plans for government workers, including teachers.

The leader of the American Federation of Teachers, Randi Weingarten, sees some of the proposals, in particular the pension issue, as an attack on teachers. She also has influence over more than $1 trillion in public-teacher pension plans, many of which traditionally invest in hedge funds.

It is a recipe for a battle for the ages.

Ms. Weingarten started by targeting hedge-fund managers she deemed a threat to teachers and urged unions to yank money from their funds. Then she moved to Wall Street as a whole.

Her union federation is funding a lobbying campaign to eliminate the “carried-interest” tax rate on investment income earned by many money managers. It is trying to defeat legislation that would increase the charitable deduction in New York state for donations to private schools. And it has filed a class-action lawsuit accusing 25 Wall Street firms of violating antitrust law and manipulating Treasury bond prices.

Some pension funds have withdrawn money from hedge-fund managers criticized by the teachers union. And some hedge-fund managers stopped making donations to advocacy groups targeted by Ms. Weingarten.

Hedge funds, reluctant to buckle to the pressure, say Ms. Weingarten is doing a disservice to the teachers she represents, because funds should aim solely to earn the highest possible return on their assets. The personal beliefs or donations of hedge-fund managers, they argue, shouldn’t be a factor in that decision. At least one manager, Mr. Loeb of Third Point LLC, has increased his donations to a charter-school group, citing Ms. Weingarten.

Sander Read, chief executive officer of Lyons Wealth Management, which hasn’t been targeted, likened what Ms. Weingarten is doing to “hiring a dentist because of their political beliefs. You may see eye to eye on politics, but you may not have great, straight teeth.” None of the hedge funds targeted by the teachers unions would discuss the matter publicly, a sign of how sensitive the battle has become.

Ms. Weingarten said in an interview: “Why would you put your money with someone who wants to destroy you?”

The battles are rooted in a political fight over how to improve public education. Republicans have long sought major changes, such as creating new competition for public schools, including charter schools. Democrats largely have supported solutions backed by the unions, particularly increased spending for existing schools.

About a decade ago, some liberals joined conservatives in pushing to expand charter schools. Those efforts received financial support from hedge-fund managers including Mr. Loeb, Mr. Singer of Elliott Management Corp. and Paul Tudor Jones of Tudor Investment Corp., who together kicked in millions of dollars.

Some of those involved in the effort cast public-school teachers and their unions as obstacles to improving education. The reputation of the teachers union took a beating.

When Ms. Weingarten was elected president of the American Federation of Teachers in 2008, she aimed to restore public trust in public-school teachers and their unions.

As she rose in the union, she got close to Bill and Hillary Clinton. Last summer, the federation became the first union group to endorse Mrs. Clinton’s presidential campaign. Ms. Weingarten sat on the board of the super PAC supporting her candidacy, and the American Federation of Teachers has donated $1.6 million to the Bill, Hillary and Chelsea Clinton Foundation.

Ms. Weingarten’s federation represents about two dozen teachers unions whose retirement funds have a total of $630 billion in assets, a big chunk of the more than $1 trillion controlled by all teachers unions. The federation doesn’t control where that money is invested; the unions themselves do. But Ms. Weingarten can make recommendations.

She instructed investment advisers at the federation’s Washington headquarters to sift through financial reports and examine the personal charitable donations of hedge-fund managers. She says she focuses on groups that want to end defined-benefit pensions. Many of the same entities also back charter schools and overhauling public schools.

In early 2013, the union federation published a list of roughly three-dozen Wall Street asset managers it says donated to organizations that support causes opposed by the union. It wanted union pension funds to use the list to decide where to invest their money.

The Manhattan Institute for Policy Research, a think tank that supports increasing school choice and replacing defined-benefit pension plans with 401(k)-type plans for future government employees, is one of the groups to which donations were viewed unfavorably.

Lawrence Mone, its president, says the tactics amount to intimidation. “I don’t think that it’s beneficial to the functioning of a democratic society,” he says.

After KKR & Co. President Henry Kravis made the list in 2013, Ms. Weingarten got a call from Ken Mehlman, an executive at the private-equity firm and former chairman of the Republican National Committee.

Mr. Mehlman said KKR had a record of supporting public pension plans, according to Ms. Weingarten.

Ms. Weingarten agreed, removed Mr. Kravis’s name from the list and invited Mr. Mehlman to talk about the firm’s commitment to public pensions at a meeting in Washington with 30 pension-fund trustees representing 20 plans that control $630 billion in teachers’ retirement money.

When Cliff Asness of hedge fund AQR Capital Management LLC found out Mr. Kravis had gotten off the list, he called Mr. Mehlman, a friend. Mr. Asness also hired a friend of Ms. Weingarten’s: Donna Brazile, a vice chairwoman of the Democratic National Committee who has been a paid consultant to the American Federation of Teachers.

Ms. Brazile arranged a lunch meeting between Mr. Asness and Ms. Weingarten, where they discussed ways to work together. Not long after, Mr. Asness’s firm paid $25,000 to be a founding member of a group that KKR’s Mr. Mehlman was starting with Ms. Weingarten to promote retirement security.

Mr. Asness was removed from the list. A year later, when Ms. Weingarten noticed he continued to serve on the Manhattan Institute board, she considered putting him back on.

In September of last year, when the California State Teachers’ Retirement System, or Calstrs, considered increasing its hedge-fund investments, Ms. Weingarten saw another chance to apply pressure.

Dan Pedrotty, an aide to Ms. Weingarten who runs the hedge-fund effort, spoke to a Calstrs official about Mr. Asness’s continued service on the Manhattan Institute’s board. The Calstrs official then called Mr. Asness.

In December, Mr. Asness said he would step down from the Manhattan Institute board. His spokesman says he already had made the decision at the time of the call, after reassessing time spent on the boards of several nonprofit groups.

“Randi is committed to helping hard working employees achieve the secure retirement they deserve,” Mr. Asness said in a written statement.

Mr. Loeb, founder of the $16-billion Third Point fund, has been more combative. He is a donor to the Manhattan Institute and chairman of the Success Academy, which operates a network of charter schools in New York City.

In a March 2013 letter to Mr. Loeb, Ms. Weingarten noted his support of a group “leading the attack on defined benefit pension funds” and said she was “surprised to learn of your interest in working with public pension plan investors.” Seeking business from union pension funds while donating to the group, she wrote, “seem to us perhaps inconsistent.”

The two agreed to meet.

Mr. Loeb emailed Ms. Weingarten, noting his fund’s average annual return of 21% over 18 years. “I completely respect the political considerations you may have and understand if other factors dictate how funds are allocated,” he wrote.

A week later, Ms. Weingarten wrote back to reiterate that unions were wary of investing with Mr. Loeb “given the political attack on defined benefit funds.”

In response, Mr. Loeb asserted that it must be “frustrating” for unions to invest with funds that “have different political views or party affiliations.” He added: “At least we can rejoice in knowing that as Americans we share fundamental values that elevate individual opportunity, accountability, freedom, fairness and prosperity.”

The meeting was called off, and Mr. Loeb was added to the list.

At a fundraising dinner that May for his charter-school group, Mr. Loeb stood up and said: “Some of you in this room have come under attack for supporting charter-school education reform and freedom in general.” He called Ms. Weingarten the “leader of the attack” and pledged an additional $1 million in her name.

“Both Randi and I believe America’s children deserve a 21st century education, and I hope the day comes when she embraces the positive change created by public charter schools,” Mr. Loeb said recently in a written statement.

In late 2013, state union officials pressed a Rhode Island pension fund to fire Third Point. The following January, the pension fund did just that, pulling about $75 million from Mr. Loeb’s fund. A spokeswoman for the state treasurer said at the time that Mr. Loeb’s fund was too risky.

Roger Boudreau, a member of the teachers union and an elected adviser of the Rhode Island fund at the time, says the donations played a role. “It’s fair to say that those kinds of donations are going to be looked at very critically,” he says.

Around that time, a giant billboard appeared above Times Square. “Randi Weingarten’s Union Protects Bad Teachers,” it read above a picture of her scowling face.

Ms. Weingarten immediately assumed the hedge-funders were behind the attack. The entity listed as the billboard’s sponsor is the Center for Union Facts, a Washington-based advocacy group. The group declines to disclose who paid for the billboard.

“We all guessed it had to be people like Dan Loeb,” Ms. Weingarten says. Mr. Loeb declined to comment.

The billboard kicked off a campaign against Ms. Weingarten by the Center for Union Facts, including radio and newspaper advertisements. “She’s the head of the snake, so it was appropriate to go after her personally,” says the group’s president, Richard Berman.

The ads directed people to a website that said she oversaw a “crusade to stymie school reforms and protect the jobs of incompetent teachers.” It listed her salary and called her a “member of the elite.”

In September 2014, Mr. Berman sent a 10-page letter to lawmakers, union officials and opinion leaders charging that Ms. Weingarten‘s “ineptitude is a threat against America, against hard-working teachers, and especially against our nation’s children.”

Lorretta Johnson, secretary-treasurer of the American Federation of Teachers, responded in a letter to union leaders that Mr. Berman represented a “front group whose mission is to vilify and destroy unions.”

After the billboards appeared, Ms. Weingarten opened several new lines of attack. Her union group helped launch an advocacy group, Hedge Clippers, that lobbied against proposed New York legislation to increase the charitable deduction for donations to public and private schools. The group publicized donations that it says several Wall Street executives made to the governor, who supported the legislation, and named the elite schools it says their children attended. The state senate hasn’t acted on the proposed legislation.

Last fall, Ms. Weingarten’s union group published a report criticizing hedge funds, called “All That Glitters Is Not Gold.” Among other things, the report claimed that the high fees charged by hedge funds made them unattractive investments.

The report said that 11 big pension funds it analyzed paid an average of $81 million each in annual fees to hedge funds. Those pension funds, it said, earned better returns on money that wasn’t invested in hedge funds.

AQR’s Mr. Asness, in a presentation to the Ohio pension board in March, acknowledged that some hedge funds charge high fees, but said that didn’t mean “the net deal for investors is a bad one, just that it could and should be better.”

Earlier this year, an Illinois public-pension fund cut its hedge-fund investments. In April, one of New York City’s public-pension funds voted to dump its investments in hedge funds. Ms. Weingarten tried to get a big Ohio fund to follow suit. It voted recently to remain invested in hedge funds, including in Mr. Loeb’s.

Wow, so much drama, where do I begin? Well, the first thing I would say is this article bolsters the point I made in the New York Times back in 2013 that US public pension funds need independent, qualified investment boards.

There is way too much political meddling from unions, governments and rich hedge fund and private equity fund managers into the way investments are managed at US public pensions. This is done deliberately so that they can maintain the status quo and milk US public pensions dry.

The second point I’d like to state publicly is I’m tired of arrogant hedge fund managers, many of which are nothing more than glorified asset gatherers charging alpha fees for leveraged beta, taking on teachers’ unions or any other public sector union. These idiots would have never made the Forbes list of rich and famous if it wasn’t for the blood, sweat and tears of teachers, police officers, firemen, and public sector workers contributing to their defined-benefit public pensions.

And yet they have the gall to fund right-wing think tanks like the Manhattan Institute which promote dumb ideas like replacing defined-benefit plans with defined-contribution plans, totally ignoring the brutal truth on the latter plans.

My message to hedge fund managers who fund such think tanks is to educate yourselves and learn the benefits of well-governed defined-benefit plans like the ones we have in Canada.

If all these “brilliant” hedge fund managers were really the smartest people that money can buy, they’d be fighting tooth and nail to promote large well-governed defined-benefit plans.

What else? I highly suggest billionaire hedge fund managers and private equity managers remain apolitical. If you have political views, keep them to yourself and don’t go public and donate millions to groups that want to destroy public sector unions. It’s mind-boggling how arrogant and dumb some hedge fund managers truly are.

Don’t get me wrong, public unions are just as much to blame for the pathetic state of US public pensions. They too are delusional if they think the status quo is acceptable. And they definitely need to stop meddling in investment decisions which are not in the best interests of their members.

Having said this, if I was part of a teachers’ union or any public sector union and my pension contributions were going to enrich some rich arrogant hedge fund manager who was funding organizations looking to weaken defined-benefit plans, I too would be irate.

And to add insult upon injury, it’s not like hedge funds are outperforming while they charge insane fees to their investors. The truth is hedge funds face their own day of reckoning and as I’ve been warning my readers, it’s only going to get worse in a deflationary world.

Let me be crystal clear. I don’t care if it’s Dan Loeb, Paul Singer, Bill Ackman, Ken Griffin, or whichever Republican or Democratic hedge fund manager, my advice is to shut up, stay apolitical, and focus on your fund’s performance. That’s it, that is the only thing you should be obsessing about.

But I also have some harsh advice for Ms. Weingarten and public sector unions. Stop meddling in public pension fund investments, more often than not, you’ll be doing your members a great disservice.

The problem in the United States is the lack of pension governance which separates public pensions from governments, public unions and elite asset managers. If they had the right governance model, like we do in Canada, they would be able to attract and retain qualified pension fund managers to bring most assets internally instead of farming them out to external managers which rake them on fees.

Still, even in Canada, public pensions do invest in external hedge fund and private equity funds when it serves their members’ needs. Ontario Teachers’ Pension Plan may have experienced some Brazilian blunders but there’s no denying it’s one of the best public pension plans in the world with a stellar long-term track record and it invests in top hedge funds and private equity funds.

In fact, if I was Ms. Weingarten, I would spend a lot less time waging public war against hedge funds and a lot more time studying the governance model at Ontario Teachers’ Pension Plan which is the key reason behind its success.

One former hedge funder shared these thoughts with me after reading my comment:

Public policy isn’t my thing but here are a couple rookie thoughts:

1) I think carried interest might be a bigger deal in PE than in Hedgefundistan.

2) Advocacy for charter schools is not really about the children. It is about how hedge fund guys think of themselves. They want power and attention. The children are secondary.

3) I don’t blame hedge fund guys for expressing political views. I blame US for listening. Who gives a damn what they think? Public policy is not their thing. But I would not demand their silence.

I agree but unlike him, I would demand their silence, especially if they are willfully ignorant on public policy.

Public employees are paying more into their public pension plan, and that trend is expected to continue, according to a report on pension reforms from NASRA.

The St. Louis Post-Dispatch summarizes:

To combat increasing employer pension costs, U.S. states enacted pension plan reforms that mainly reduced benefits for new hires and increased employee contribution rates for new hires and current workers.

After nearly a decade at 5 percent, the median employee contribution rate increased to 5.7 percent in 2012 and further to 6 percent in 2014, according to a March 2016 National Association of State Retirement Administrators report.

The U.S. Census Bureau will release its quarterly report on state and local government public pensions on Thursday.

“For many years in (NASRA’s) data set, the median employee contribution rate held constant despite a number of states passing increases to their employee contribution rates,” said Alex Brown, a research manager at NASRA.

Nearly all states have made pension reforms since 2009. More than 35 states have passed increases to required employee contribution rates, Brown said.

Quarterly employee contributions averaged about $10.8 billion in 2015, the highest amount ever, and an increase of 1.39 percent from the 2014 average and 7.69 percent from the 2013 average, according to data taken from the U.S. Census Bureau.

Chicago Mayor Rahm Emanuel is closing in on a set of proposals to raise revenue to fund its largest pension plan, the Municipal Employees Pension Fund.

There are several options on the table, according to the Chicago Sun-Times:

Mayor Rahm Emanuel is closing in on a deal to save the largest of Chicago’s four city employee pension funds that calls for a mix of cost cutting, employee tradeoffs and new revenue from beleaguered Chicago taxpayers.

The City Council’s Progressive Caucus last year served up a smorgasbord of revenue ideas that included a “stormwater stress tax” on big-box stores and other business giants that put pressure on the sewer system.

[…]

Other possibilities:

* A fee specifically for pensions that would be tacked on to water bills, same as Chicago’s new $9.50 a month fee for garbage collection.

* Yet another property tax increase on top of the $588 million increase approved last fall for police and fire pensions and school construction, and the $175 million increase Emanuel has offered to impose for teacher pensions.

* An increase in utility taxes and fees on electricity, natural gas and telecommunications that account for 12 percent of all corporate fund revenue or $441 million this year.

The Government Accountability office has agreed to probe the finances of the Central States Pension Fund, per the request last week of 51 Congressional Democrats.

Central States was the first multiemployer pension plan to submit a proposal to the Treasury to cut member benefits.

Lawmakers want to know if any wrongdoing was the cause of the fund’s insolvency.

From Bloomberg BNA:

The lawmakers asked the GAO to probe the fund’s investment decisions going back to 1982, when the fund came under the supervision of a court-ordered consent decree.

Charles Jeszeck, the GAO’s director of education, workforce, and income security, told Bloomberg BNA June 28 that his agency expects to make staff assignments and begin work on the project soon.

[…]

The GAO is already investigating the Labor Department’s supervision of the fund in response to a request by Sen. Charles Grassley (R-Iowa).Kaptur said in a news release announcing the request that she wanted the GAO to “get to the bottom of” allegations that the fund had questionable investments in “Iraqi banks in 2008, during a full-scale war” and in “unstable Russian banks, when the economy there is in shambles.” She also said she wants the GAO to look into the fund’s $1.4 billion investment in risky mortgage-backed bonds “in the middle of the housing meltdown.”

Thomas C. Nyhan, the executive director and general counsel of the Central States fund, told Bloomberg BNA at the time of the lawmakers’ request to the GAO that while he didn’t see any reason for an investigation of the fund, he welcomed it as means to end “all of the groundless speculation.”

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Theresa Tedesco of the National Post reports, Buyer beware: How the Ontario Teachers’ Pension Plan got caught in the fallout of Brazil’s biggest scandal:

An investigation into money laundering at gas stations and laundromats that began two years ago in southern Brazil has since mushroomed into a wide sweeping corruption scandal, creating a national soap opera that has enthralled Brazilians as it reaches into the upper echelons of the country’s political and corporate elites.

Operation Lava Jato (Car Wash), launched by Brazil’s federal police, has ensnared top executives at Brazil’s powerful state-controlled oil giant Petroleo Brasileiro SA (Petrobras) who are alleged to have accepted bribes from a cartel of companies to enrich themselves while also channelling funds to politicians.

The fallout has included the recent impeachment of President Dilma Rousseff and the arrest of dozens of senior politicians and business leaders. But also caught up in the tumult are hundreds of millions of dollars managed by some of the world’s biggest investors, including Ontario Teachers’ Pension Plan, one of Canada’s biggest and most respected publicly funded pension funds.

Teachers’ is among a group of major global investors who own an 18.6-per-cent stake in Grupo BTG Pactual SA, the largest independent investment bank in Latin America, whose billionaire founder, chairman and chief executive, Andre Santos Esteves, was arrested last November for allegedly attempting to obstruct the corruption probe.

The charismatic 47-year-old, with an estimated net worth of US$2.2 billion according to Forbes Magazine, is the highest-profile business executive implicated in the widening corruption dragnet and was held under house arrest for almost four months until he was released in late April.

The current criminal charges against Esteves are still pending and he has vehemently and repeatedly denied any wrongdoing. Yet he was forced to resign from his executive roles at BTG Pactual, although he remains the controlling shareholder.

Shares of BTG Pactual, which are listed on the BM&F Bovespa and NYSE Euronext, have collapsed, losing more than 50 per cent of their value before recovering some ground although they are still down 42 per cent. The investment bank’s bonds have been downgraded to junk status by credit rating agencies Moody’s Investor Services Inc., Fitch Ratings and Standard & Poor’s.

BTG Pactual in May was also listed among nine financial institutions placed under “special surveillance” by Brazil’s central bank, which is closely monitoring the liquidity and stability of their operations, according to a report by Reuters.

The firm, which Esteves steered through an aggressive global expansion, has sold more than US$3.5 billion in assets, including loan books and its Swiss private-banking unit BSI, slashed dividend payments and cut costs at its operations in Brazil, Europe and Hong Kong.

Teachers’ original $206-million private-placement investment made in December 2010 is now worth less than $150 million.

Teachers’, which has a reputation for promoting good governance and principled investing, declined repeated requests to answer questions about its investment in the Brazilian investment bank and association with Esteves, who along with other business associates have a track record of being on the wrong side of securities laws.

“We very rarely discuss the mechanics of our decisions and rationale for specific investments in companies or assets,” Deborah Allan, vice-president of media relations, said in an email. “We’re a global and well diversified long term investor, and we operate with the principles of investment risk.”

There’s no doubt the pursuit of higher returns is increasingly propelling major Canadian pension funds to invest in emerging markets such as Brazil, said Malcolm Hamilton, an actuary and former partner at Mercer with 40 years’ experience in the pension industry.

“The pressure has just been getting worse and worse, especially as interest rates continue to decline, for public funds to try to get the returns they used to get,” he said. “They want to invest where they can achieve the best return for the risk they take, and this means looking beyond Canada and North America to opportunities elsewhere in the world.”

Those opportunities also bring heightened risk.

“Sometimes it’s hard to perform tough due diligence in developing countries, especially when people will always present you with the best possible picture,” said a senior pension expert who asked not to be named. “Sometimes you make mistakes and you’ve got to keep it even when it’s tricky.”

Added Keith Ambachtsheer, director emeritus at the Rotman International Centre for Pension Management at the University of Toronto: “When you’re in this type of situation, maybe the right way to go is to try to save the investment, clean up the situation and drive on.”

• • •

Andre Santos Esteves, also known as the golden boy of Brazilian banking, and his partners pulled off a major coup when they persuaded an impressive group of nine major global investors — mostly sovereign-wealth funds and rich families — to purchase an 18.65-per-cent interest in BTG Pactual for US$1.8 billion in December 2010.

But it seems Teachers’ held a special place in Esteves’ heart. During the annual Foreign Policy Association’s Financial Services Dinner at the Pierre hotel in midtown Manhattan for 400 well-heeled guests on Feb. 29, 2012, he introduced the evening’s guest of honour, James Leech, then the chief executive of Teachers’ as “one of the most sophisticated investors in the world.”

In his heavily accented English, the billionaire that Forbes ranked 13th richest in his country, declared that his bank has “a very special relationship with Ontario Teachers’,” adding that when BTG Pactual organized the largest private placement in Latin America, “Ontario Teachers’ was one of the cornerstone investors.”

Each of those investors — China Investment Corp., Singapore’s Government Investment Corp. Pte Ltd., Abu Dhabi Investment Council, J.C. Flowers & Co., RIT Capital Partners PLC, Colombia’s Santo Domingo Group, Exor, Inversiones Bahia and Teachers’ — invested anywhere from $25 million to $300 million.

In return, the investment consortium received three seats on the Sao Paulo-based bank’s board, one of which was given to Teachers’ (which has appointed people to the post, although it is been vacated since Esteves’ arrest). More importantly, the investors were guaranteed handsome returns down the line when BTG Pactual eventually went to the public markets.

A 2011 analyst report for Exor noted the investment company controlled by Italy’s Agnelli family was given “a guaranteed minimum IRR (internal rate of return) of 20 per cent for its commitment to the IPO.”

But two months before the private-placement deal was inked, central bank investigators and securities regulators in Brazil threatened to derail it.

In October 2010, a probe inside Brazil’s central bank recommended that Esteves be banned from banking in the South American country for six years due to “serious infractions” of banking rules between 2002 and 2004, according to a report by Reuters.

The investigation focused on US$3.8-billion worth of trades between Banco Pactual SA and a limited liability corporation known as Romanche Investment Corp. LLC in Delaware.

Brazil’s central bank director Sidnei Correa Marques ruled against the ban in early 2011, apparently because of the importance of BTG Pactual, the precursor to Banco Pactual, to the economy and the perception of disciplining the head of Brazil’s largest investment bank.

“When a bank is important systemically, important to the country, among the 10 largest, I have to be careful about getting rid of essential management at that financial institution,” the central bank director was quoted by Reuters.

However, Brazil’s securities market authority — the Comissao de Valores Mobilianos (CVM) — was less forgiving. In a separate case, the market watchdog concluded that Banco Pactual had illegally transferred profits to foreign funds to disguise gains and avoid taxes. In 2007, the CVM fined Pactual and Esteves about US$4 million although there was no admission of guilt or wrongdoing.

By the time the two decisions were rendered, Esteves had already persuaded Teachers’ and eight other well-heeled investors to give him the all-important credibility to eventually take his bank to market.

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BTG Pactual’s initial public offering, the first for an investment bank in Brazil and the most high-profile and lucrative pubic offering that Brazilian capital markets had seen in almost a year, occurred April 26, 2012. The stock was priced at 31.25 reals and the IPO raised about US$1.96 billion.

That same year, Esteves was honoured as “Person of the Year” by the Brazilian-American Chamber of Commerce and one of the 10 most influential bankers in the world by Bloomberg Magazine, alongside Wall Street icons Jamie Dimon of JP Morgan Chase and Lloyd Blankfein of Goldman Sachs, as well as Gerald McCaughey, then chief executive of Canadian Imperial Bank of Commerce.

Behind the scenes, however, Esteves’s past brushes with securities regulators began to emerge.

A month before BTG Pactual’s private-placement deal was signed in December 2010, Italian market regulators had notified Esteves that he was the target of an insider trading probe dating back to 2007, when he was head of fixed income at UBS.

The Commissione Nazionale per le Societa e La Borsa alleged that Esteves used a private account to purchase shares in Italian meat producer Cremonini SpA after he heard about an upcoming joint venture with a Brazilian company.

Esteves denied and fought the allegations, but apparently did not inform his investors of the ongoing probe when they participated in the 2010 private placement. Nor was the probe disclosed to potential investors in BTG Pactual’s initial IPO prospectus in April 2012.

On April 4, 2012 — three weeks before BTG Pactual’s IPO — Italy’s capital markets authority fined Esteves 350,000 euros for alleged insider trading.

The findings and penalties against the Brazilian banking executive were “administrative,” however he was suspended nine months from serving as a director or executive officer of a company regulated by the Italian securities commission. As well, he was forced to return his alleged profits of US$5.4 million.

A day before the Italian regulator released its decision, BTG Pactual amended its IPO prospectus and issued a statement that read “our controlling shareholder is a subject of an ongoing civil, non-criminal investigation in Europe in connection with certain trades in the securities of a European market issuer made by him in his personal capacity in 2007.”

Notably absent is any mention of Esteves directly or that the controlling shareholder was also the chief executive and chairman of the board of BTG Pactual. (Esteves would file an “administrative appeal,” later withdrawn despite his protestations of innocence, citing costs and a loss of time as his reasons.)

Even so, Brazil’s securities regulator CVM issued a receipt blessing the IPO.

“Under those circumstances, why was the IPO even allowed to proceed?” asked a senior Canadian regulator who spoke on the condition of anonymity. “At a minimum, the Brazilian securities regulator should have demanded disclosure of Esteves’s role in the company. Any commission in Canada and the SEC [the U.S. Securities and Exchange Commission] certainly would have insisted.”

Sources say the private-placement shareholder group was broadsided by the revelations of Esteves’s track record of securities violations.

In the days following the Italian probe, principal investors were given the opportunity to back out of the deal and some took the opportunity.

For example, the Agnelli family, which invested US$25 million, sold 87 per cent of its 0.26-per-cent interest less than a month after learning of Esteves’ insider trading conviction, according to a 2011 filing. U.S. investment firm J.C. Flowers began slowly divesting some of its stake, as did RIT Capital Partners and China Investment Corp.

What they didn’t know at the time was that Charles Rosier, a partner at BTG Pactual in charge of client relations in Europe, had also been in the crosshairs of securities regulators while Esteves was gathering the consortium of investors back in 2010.

France’s market regulator was probing insider trading during the French state railway’s takeover of a logistics company called Geodis in March 2008, while Rosier was a managing director at UBS, which had advised on the deal.

The result was that the Autorite des Marches Financiers in October 2013 levied the largest fine in its history by penalizing Rosier 400,000 euros for tipping insider information to his cousin prior to the deal.

The investigation of Rosier and his subsequent conviction have not been disclosed in any of BTG Pactual’s corporate filings. Calls to a number of the consortium investors and BTG Pactual were not returned.

Since the revelations of Esteves’ insider trading convictions in 2012 and the bribery and corruption charges against him in 2015, sources familiar with the Brazilian investment bank say six of the nine principal investors have sold their interests.

The three remaining “cornerstone” investors are Singapore’s sovereign fund, Colombia’s Santo Domingo Group, which among other holdings held the second-largest stake in SABMiller PLC, the world’s second-largest beer company, and Teachers’.

At the end of 2012, Teachers’, which manages $171.4 billion in net assets, had $206 million invested and that exposure remained the same at end of 2013. The following year in 2014, it was down to $203.4 million and by Dec. 31, 2015, the value plunged below $150 million, mostly due to the fallout of Esteves’ arrest.

“We remain an investor,” Teachers’ spokesperson Allan confirmed in an email, adding, “it remains part of our relationship investing portfolio, in our public equities asset class.”

Ultimately, Teachers’ main function is to create value for plan participants and it has certainly done that. In the four years since BTG Pactual’s IPO, the pension fund has enjoyed annual returns of 13 per cent in 2012, 10.9 per cent in 2013, 11.8 per cent in 2014 and 13 per cent in 2015.

Teachers’ investment in BTG Pactual is relatively small, but it raises questions about its ability to properly vet investments far from home, and its troubles in Brazil are far from over. A multi-million-dollar lawsuit launched by a former executive against BTG Pactual in Hong Kong also threatens to drag the investment bank’s principal partners, including Teachers’, into another potentially unseemly mess.

So what is this all about? Basically André Santos Esteves, the golden boy of Brazilian banking, was able to schmooze Ontario Teachers and large sovereign wealth funds into buying a 19% stake of BTG Pactual through a private placement and now it turns out he might be another Brazilian con artist.

Remember Eike Batista, Brazil’s rags to riches (back to rags) billionaire boy wonder? He too burned Ontario Teachers but at least they invested early on with him and made money in those investments before Batista’s massive empire crumbled (a former colleague of mine who met Batista told me “he was an unbelievable salesman”).

I’m sure Teachers made some money off BTG Pactual too. When I was working at the Caisse, we had invested in BTG Pactual’s multi-strategy hedge fund and everything was kosher and it performed exceptionally well (don’t think the Caisse is invested in it any longer; its hedge fund program has been slashed). BTG Pactual is a Latin American powerhouse when it comes to banking.

More importantly, this deal represents a small investment in Teachers’ huge portfolio, so it will be able to absorb any losses and it won’t make a dent in the overall performance which has been stellar in the last ten years.

Having said this, even if it’s a small deal, the last thing Ontario Teachers or any big Canadian pension fund needs is headline risk.

Don’t forget, back in February, news broke out that Teachers stepped on a German land mine, so the last thing Teachers needs is more negative press highlighting its supposedly weak due diligence.

The truth is Ontario Teachers has a great due diligence team but my sources tell me it might be stretched thin, covering everything from hedge funds, to private equity funds, private placements and PIPE deals. If this is true, OTPP’s board and senior management need to rectify it.

I sent this article to Ron Mock, Ontario Teachers’ CEO, and Jim Leech, the former CEO. Not surprisingly, they didn’t reply but I already know what their reply would be: “Sometimes you find gems of deals and sometimes you get burned badly, it’s the nature of taking risks in emerging markets and elsewhere.”

That’s true but Ive been very skeptical about Brazil’s boom for a long time and think many Canadian pension funds were too quick to pull the trigger, even if these are long-term investments.

Investing in emerging markets isn’t easy. You need to find the right partners and make sure they’ve got the right alignment of interests and aren’t con artists. I don’t trust many fund managers in Brazil and think there are a lot of blowhards there selling snake oil. Then again, Brazil is home of 3G Capital, arguably the best private equity fund in the world (at least Warren Buffet thinks so).

And while there’s no denying Brazil has huge potential, it’s currently experiencing a lot of political and economic turmoil, highlighted by the fact that the 2016 Rio Olympic Games are in dire straits.

The lesson for Canada’s large pension funds? Choose your investment partners very carefully in emerging markets like Brazil, Russia, China and India but no matter how well you vet them, be prepared for headline risk if things go awfully wrong.

As for Ontario Teachers,  I have no doubt that Wayne Kozun and his team know what they’re doing and while the article above raises a lot of red flags, you need to take everything you read with a grain of salt. I’m sure it’s not all terrible or else Teachers would have dumped this investment a long time ago. Also, keep in mind, the media reports only bad news, not the investments that went well in Brazil.