Pay to play: Did Pa. Treasury's agent ban arrive too late?

(With updates from SERS and PSERS) New Pennsylvania State Treasurer Joe Torsella made good on a campaign pledge yesterday when he declared a "Prohibition" on the use of ex-pro athletes and other "placement agents," a.k.a. solicitor-agents or finders, by private firms seeking well-connected local help in landing contracts to manage up to $16 billion in state investment contracts.

Torsella associates these advisors, who are paid to help get state business, with corruption, citing pay-to-play cases in Pennsylvania and New York. See the new state treasurer's order here, press statement here, and story by my colleagues Craig McCoy and Mark Fazlollah here.

Who won't get paid as a result? Turns out the Treasurer doesn't know: "Since Treasury does not approve payments to middleman, we don’t have a view into how a company allocates its payments and can’t say for sure how many have this type of relationship," spokesman Scott Sloat told me. "We suspect it is no more than a handful. 


"Because this policy applies to both future and current contracts, Treasurer Torsella has instructed Treasury to proactively reach out to each of our current investment managers informing them of the new policy and outlining how they will unwind a third-party agreement, if they have one, to remain eligible to invest on behalf of Treasury."

In fact, banning placement agents in 2017 is closing the barn door after the horse escaped, Chris Tobe, author of Kentucky Fried Pensions, one of the great state-pension influence-peddling exposes, told me:

"Placement agents have really not been used that much in the last 5 years.  (Since the Citizens United Supreme Court decision striking down limits on some campaign contributions), all the alternative managers can (now donate) directly to superPACs," national political action committees, with limited public disclosure. 

Pennsylvania's pension funds, which manage five times as much state money ($80 billion) as Torsella, still have no plans to bar managers from hiring well-wired agents to help them land state contracts. Indeed, state managers are still hiring them: "Our position hasn’t changed," says Pamela Hile, spokeswoman for the State Employees' Retirement System.

Unlike Philadelphia or New York City, the state doesn't ban placement agents. When it finds a money manager has used a placement agent, SERS does "deduct that cost from what we pay the general partner," which is to say, the investment manager, Hile told me.

Usually that means a cut against management fees. So a firm that hires a placement agent pays twice, in effect.  

But how often does that actually happen?

Of the eight new money managers SERS hired last year five use placement agents -- but none at SERS. Mostly this is now a foreign phenomenon, according to SERS records:

Advent GPE VIII  -- no placement agent 
Ardian Secondaries VII & Co-invest -- uses Volcom Capital to land business in  South America, and LB Investment Ltd. in Switzerland
Permira VI -- no placement agent
Vista Equity Partners VI -- PrivilEdge and Neuberger Berman "on a limited basis" to assist with fund raisings in Europe and Japan
Providence Strategic Growth II -- no placement agent
Platinum Equity IV -- Volcom Capital, South America
FSN V -- Campbell Lutyens
TDR Capital III -- Campbell Lutyens

Over at the Pennsylvania Public School Employees' Retirement Service, spokeswoman Evelyn Tatkovski Williams adds that PSERS also permits the use of placement agents. In some cases PSERS, like SERS, may reduce or "offset" the fees it pays managers who pay agents. I've asked for more detail.

I expect I'll also be hearing back from the Third-Party Marketers' Association, which represents placement agents, with their own response to Torsella.

Last year, when Torsella noted that ex-Treasurer Rob McCord, who is facing federal prison time after pleading guilty to demanding campaign cash from money managers, had taken cash from investment managers' financial advisers, the association noted how one such adviser wasn't a registered placement agent, so banning registered agents wouldn't have stopped the transactions.

But Torsella's directive appears to ban the use of paid agents altogether, registered or not.

See also my Jan. 27, 2013, Sunday Inquirer column, "State pension board made expensive bet on hedge funds," appended here because it's not at the moment available on our Web site:

By Joseph N. DiStefano

   It was an expensive throw of the dice:
   Back in 2006, the Pennsylvania State Employees Retirement System (SERS) and its board, headed by ex-state Rep. Nicholas Maiale (D., Phila.), gave more than $3 billion to six private investment firms so they could use it to buy high-priced hedge fund investments, in hopes of fat profits.
   The goal was to beat the sluggish stock and bond markets and ease the system's deficit, which had been growing since Gov. Tom Ridge boosted pensions in 2001 but failed to pay for the increase.
   One beneficiary of Pennsylvania's hedge fund strategy was a New York firm, Arden Asset Management. The state paid Arden $20 million to pick hedge funds from 2006-12.
   About 20 percent of that fee went to former Phillies pitcher Larry Christenson and his partners. Christenson is what investors call a "third-party marketer" or "placement agent," whose job is to help funds such as Arden get hired by clients such as Pennsylvania.
   Christenson rubs elbows with Pennsylvania movers and shakers. Last June, Christenson cosponsored a fund-raiser for NHS Human Services, a Philadelphia-based, multistate social service agency headed by ex-state Sen. Joseph Rocks, a longtime member of the SERS board that hires managers such as Arden.
   I asked Christenson whether sponsoring events for SERS trustees' charities helped his clients get hired.
   "This world is run with relationships," Christenson told me. "People like to do business with people they like.
  "We comply with every single rule and regulation. We aren't paying to play."
   Christenson said he and his peers at other firms are glad to support a number of charities supported by people who worked for their government, business, and labor union clients.
   But hedge funds, instead of boosting returns, lagged. The Bloomberg Hedge Fund Index shows investors lost an average of 10 cents of every dollar invested in hedge funds from mid-2007 through mid-2012.
   Arden did better: it made almost 2 cents on every dollar from 2007-12, pension spokeswoman Pamela Hile told me. But that was still below the system's 7.5 percent annual investment target.
   Vanguard Group's venerable Wellington Fund, a mix of stocks and bonds, gained 19 percent for the same five-year period.
   Pennsylvania announced in 2012 plans to liquidate hedge managers, including Arden.
   "Arden wasn't 'fired,' " Hile told me. "Rather, the [assets] that they held no longer fit or produced what was necessary to make sense for the total fund."
   But last week, SERS announced it was giving Arden $150 million to invest. Christenson will collect another piece as Arden's placement agent.
   Placement agents are illegal in states such as New York, where state treasurer Alan Hevesi pleaded guilty in 2010 to extorting a $1 million kickback for a $250 million state investment in a private fund. He went to prison.
   Christenson blamed situations such as New York's as "former politicians with their hands out asking for things they never should have had." In Pennsylvania, "I don't know if we've ever had that problem. We do it the right way," he said.
   Pennsylvania's annual taxpayer pension fund contribution is scheduled to more than double, from around $1.6 billion in 2012 to more than $4 billion four years from now.
   In his budget address Feb. 5, Gov. Corbett is likely to delay that increase, "kicking the can down the road," as his budget secretary, Charles Zogby, told me.
   Corbett also wants to cut future retirees' pensions so the need for future subsidies declines.
   And that's where hedge funds and other investing gimmicks have left us.