Tag: SEC pensions

Investment Firm Charged With Violating SEC Pay-To-Play Rule After Making Political Donations While Working For Two Pension Funds

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A Philadelphia-area private equity firm has become the first ever to be charged by the SEC for violating a pay-to-play rule set up in 2010 designed to prevent conflicts of interest when pension funds hire investment firms.

The firm, TL Ventures Inc, was charged with violating the rule after an employee at the firm made political contributions to Pennsylvania’s governor and Philadelphia’s mayor while the firm was doing work for the Philadelphia Board of Pensions and the Pennsylvania State Employees’ Retirement System.

The employee, an investment advisor, made a $2,500 campaign contribution to a candidate for Mayor of Philadelphia and a $2,000 contribution to a candidate for Governor of Pennsylvania.

The SEC says that presented a conflict of interest because the Mayor and Governor appoint a total of nine members to the two pension boards for which TL Ventures was providing investment services for at the time of the donations.

Those boards are tasked with hiring investment firms to do advisory work for the pension funds.

Bracewell & Giuliani explains the specifics of the rule:

Rule 206 (4)-5, which was adopted in 2010, prohibits investment advisers from providing compensatory advisory services to a government client for a period of two years following a campaign contribution from the firm, or from defined investment advisers, to any government officials, or political candidates in a position to influence the selection or retention of advisers to manage public pension funds or other government client assets. Some de minimus contributions are permitted, topping out at $350 if the contributor is eligible to vote for the candidate, and the contribution is from the person’s personal funds.

TL Ventures has agreed to give up the $257,000 worth of fees it earned from the state, as well as pay a $35,000 fine.

Republicans are now suing the SEC in an attempt to block the rule, saying that preventing investment advisors from making political donations is, in effect, a restriction on free speech. From Reuters:

Republican politicians sued the U.S. Securities and Exchange Commission, seeking to throw out a rule that limits political donations by investment advisers.

The Republican state committees from New York and Tennessee said the federal securities regulator had flouted due procedure when adopting its Political Contribution Rule, which they said also violated the constitutional right to freedom of speech.

“The (rule) directly harms Plaintiffs, as potential donors have informed each Plaintiff that they will not make political contributions because of the SEC’s rule,” said the complaint before a federal court in the District of Columbia, which was filed late on Thursday.

The SEC in 2010 approved the rule, which prohibits investment advisers from making campaign contributions in the hope of being awarded lucrative contracts to manage public pension funds, a practice known as “pay to play”.

The plaintiffs want the court to decide that the rule violates the law and to stop the SEC from enforcing the rule with respect to federal campaign contributions.

Specifically, Republicans are arguing that the SEC violated the Administrative Procedures Act when drafting the law. The Act requires specific procedures to be followed when drafting rules.

The Administrative Procedures Rules has been used successfully to strike down previous SEC rules.

Photo by jypsygen via Flickr CC License

After Massive Investment Losses, Michigan Pension Funds Benefit From Settlements with AIG, Private Equity Firms

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AIG revealed in an SEC filing this week that it plans to pay out a massive sum of money to settle an ongoing lawsuit claiming the firm misled investors on the quality of certain investments prior to the 2008 financial crisis.

The total settlement: $970.5 million. And certain pension funds in Michigan will likely see a chunk of that change. That’s because they lost a significant chunk of change when they bought investment vehicles from AIG prior to 2008.

The State of Michigan Retirement Systems says it lost between $110 million and $140 million due to AIG.

Detroit’s General Retirement System as well as the Saginaw Police and Fire Pension Board say they lost millions more, as well.

All told, those funds could receive a combined payout totaling eight figures. From Crain’s:

This week, AIG disclosed to the U.S. Securities and Exchange Commission it would pay $960 million under a mediation proposal to settle the consolidated litigation, on behalf of investors from that period.

[…]

The lawsuit alleges AIG executives gave false and misleading information about its financial performance and exposure to residential mortgage backed securities in the run-up to the financial market collapse.

The $54.8 billion Michigan systems — a group of plans administered by the state Office of Retirement Services for former police officers, judges and other state and public school employees — became lead plaintiff for the class in March 2009, after informing the court of its nine-figure losses.

The federal Private Securities Litigation Reform Act of 1995 says a court should presume a plaintiff is fit to lead class actions like this one if it “has the largest financial interest in the relief sought by the class.” In fact, it had about double the losses of any other plaintiff seeking the same lead role — so its piece of the nearly billion-dollar pie may be larger than most.

The bolded is important, because it means that the State of Michigan Retirement Systems will almost certainly be receiving the highest payout of any of the plaintiffs.

Meanwhile, another Michigan fund—the Police and Fire Retirement System of the City of Detroit—was the beneficiary of another settlement today.

Three private equity firms settled a seven-year-long lawsuit today that alleged the firms colluded and fixed prices in leveraged buyout deals. The firms—Kohlberg Kravis Roberts (KKR), Blackstone, and TPG—settled for $325 million.

Among the suit’s plaintiffs were public pension funds that held shares in the companies that were bought out by the firms at “artificially suppressed prices, depriving shareholders of a true and fair market value.” From DealBook:

The lawsuit, originally filed in late 2007, took aim at some of the biggest leveraged buyouts in history, portraying the private equity firms as unofficial partners in an illegal conspiracy to reduce competition.

As they collaborated on headline-grabbing deals — including the buyouts of the technology giant Freescale Semiconductor, the hospital operator HCA and the Texas utility TXU — the private equity titans developed a cozy relationship with one another, the lawsuit contended. Citing emails, the lawsuit argued that these firms would agree not to bid on certain deals as part of an informal “quid pro quo” understanding.

In September 2006, for example, when Blackstone and other firms agreed to buy Freescale for $17.6 billion, K.K.R. was circling the company as well. But Hamilton E. James, the president of Blackstone, sent a note to his colleagues about Henry R. Kravis, a co-founder of K.K.R., according to the lawsuit. “Henry Kravis just called to say congratulations and that they were standing down because he had told me before they would not jump a signed deal of ours,” Mr. James wrote.

Days later, according to the lawsuit, Mr. James wrote to George R. Roberts, another K.K.R. co-founder, using an acronym for a “public to private” transaction. “We would much rather work with you guys than against you,” Mr. James said. “Together we can be unstoppable but in opposition we can cost each other a lot of money. I hope to be in a position to call you with a large exclusive P.T.P. in the next week or 10 days.” Mr. Roberts responded, “Agreed.”

The settlement now awaits approval from the Federal District Court in Massachusetts.