April 27, 2009
New Scrutiny for N.M.'s $90 Million Loss
By Mike Gallagher
Copyright © 2009 Albuquerque Journal Journal Investigative Reporter
New Mexico's top investment official was quick to dismiss Frank Foy's allegations earlier this year when he claimed that political motives were behind the state's decision to pour $90 million into a now-worthless fund.
State Investment Officer Gary Bland's attorneys called the claims by Foy, who once oversaw investments for the Educational Retirement Board, a "McCarthy-style witch hunt" and a cynical attempt to make financial gain out of the near worldwide financial collapse.
After some legal wrangling and public sniping by lawyers, the lawsuit filed by Foy has settled into the legal grind.
But recent developments here and in New York have raised a lot more questions about New Mexico's investment practices in general and about the two transactions upon which Foy's lawsuit is based.
It isn't just Foy and his lawyers asking the questions.
That changed with a pay-to-play scandal in New York with ties to New Mexico and new revelations about millions of dollars paid to so-called third-party placement agents in both states.
FBI agents have been interviewing staff members at the State Investment Council and the ERB during the last two weeks, and the Securities and Exchange Commission has begun gathering records and conducting preliminary interviews.
The Legislative Finance Committee has scheduled a hearing on the investment of state funds and the roles of third-party placement agents, who are also referred to at times as lobbyists, marketers and consultants.
Newly released state documents show third-party agent Marc Correra, the son of a close associate of both Gov. Bill Richardson and State Investment Officer Gary Bland, shared in at least $11.5 million in fees paid in connection with SIC investments.
Correra is listed as the third-party placement agent on the SIC's $50 million investment into the Vanderbilt Financial Trust.
The SIC documents released to the Journal don't show how much Correra was paid by Vanderbilt, but the company in other records listed its "financial advisory and miscellaneous expenses" on the deal as $1.9 million.
Correra's attorney, Sam Bregman, said that, despite what the state documents say, his client did not represent Vanderbilt in the deal.
"That did not happen," Bregman said Friday. "Marc Correra never received a fee for that transaction. He was not involved in that transaction in any way, shape or form."
SIC spokesman Charles Wollmann said Saturday the staff believes the information is correct.
The value the state now lists for the $90 million investment: zero.
Foy brought his lawsuit under the Fraud Against Taxpayers Act. Defendants include Bland, Richardson's former chief of staff David Contarino, ERB Chairman Bruce Malott, Vanderbilt Capital Advisors of Chicago and a long list of financial firms.
Foy claims he was pressured by Malott, at Contarino's behest, to place business with Vanderbilt because of political considerations. The ERB board voted to make the investment.
Various Vanderbilt executives made about $15,000 in contributions to Gov. Bill Richardson's presidential campaign a year after the investments were made.
The State Investment Council never voted on the specific Vanderbilt investment. That decision, based on SIC policy, was Bland's, who also sits on the ERB.
Malott, Bland and Contarino all vehemently deny Foy's claims of political pressure.
Foy says now that he didn't like the Vanderbilt investment, didn't understand it very well at the time and that the agency wasn't well-equipped to deal with it.
Until 2005, the ERB was limited in what types of investments it could make, primarily stocks and bonds with a history of paying dividends.
The legislature changed that in 2005, but it took the ERB the better part of a year to get into a position to diversify its investments to include hedge funds, private equity funds that invest in companies that are not publicly traded and other specialty areas.
Vanderbilt was pushing a fund it had created made up of subprime mortgage backed securities called collateralized debt obligations or CDOs — the exotic instruments at the heart of the global financial meltdown.
The market for such securities collapsed last year leading to a credit crisis, the collapse of major financial firms and sending the housing market into a downward spiral.
The SIC had a track record with Vanderbilt and had been getting higher-than-expected returns on seven different Vanderbilt CDO funds.
But the last Vanderbilt investment appears to be the riskiest.
While it promised a high rate of return, it was also an equity position and highly leveraged — meaning the state could lose its entire investment if the subprime mortgages defaulted.
That's what happened when the subprime mortgage business collapsed.
Those risks were laid out by Vanderbilt but downplayed by company officials in 2006 in a presentation to the ERB. They said Vanderbilt's expertise in the subprime mortgage arena allowed them to pick and choose the best mortgages.
Malott denies the allegation that he pressured Foy and says minutes of the meeting when the investment was approved show that Foy agreed with the investment.
According to the minutes, Foy told the board that the "investment division would recommend that we invest a minimum of $20 million to a maximum of $40 million on this vehicle. ..."
Vanderbilt had originally sought a much larger investment from the state.
Bland in response to the lawsuit claims the performance of Vanderbilt's other funds made the risk reasonable.
Victor Marshall, Foy's attorney, called the Vanderbilt fund "a worthless combination of liars loans, lethal leverage and toxic waste."
Both the SEC and the FBI have talked with Foy and Marshall concerning allegations contained in the lawsuit.
Wollmann confirmed that FBI agents met with the council's staff attorney and director of private equity investments after a Journal story outlining the role of Aldus Equities in the New York pension fund scandal. Aldus, which was suspended by New Mexico officials last week, was the equity adviser to the ERB and SIC — for which it was paid a total of $1.5 million last year.
Aldus has not been charged with any crime in the New York scandal, but it did pay one of the key figures in the case, New York political figure Henry "Hank" Morris, placement agent fees for business in New York.
Aldus was an adviser to the New York State Common Pension Fund, the New Mexico SIC and ERB on investments in hedge funds, private equity and other types of investments.
Morris is listed as a placement agent on two investments made by the SIC. Other prominent figures in the New York case also show up in New Mexico investments.
Aldus says all the New Mexico investments were based on the merits of the investments after a thorough due diligence process.
Wollmann said the visit by FBI agents occurred a "day or two" before Aldus was suspended in New Mexico: "A lot of it (the FBI interviews) had to do with the process of how we make these investments."
The SIC spreadsheet shows that Marc Correra was the most popular placement agent for companies doing business with the SIC and was involved in at least 20 investments between 2004 and 2008.
His father is a close associate of Bland, and the SIC chief has said he talks to Anthony Correra almost daily about markets.
Marc Correra serves on several nonprofit boards with Bland.
According to a spokesman for the governor, "Richardson was not aware of any of the third-party marketers. Those marketers are hired by and paid by managers of the funds, not the state."
The fees were banned last week by the New York pension fund and are under review in Santa Fe. In an interview Thursday, Foy said he found the idea of third-party marketers repugnant and an invitation to trouble.
"Third-party marketers open the door to pay to play deals or payola," Foy said. "They are unnecessary."
Foy pointed out that the financial advisers and consultants hired by the state funds are supposed to let investment funds know that the state is interested in investing and in what type of funds.
While his critics dismiss Foy as self-serving, the views he expressed about third-placement agents are similar to those expressed by SIC board member Andrew Davis, who said he was concerned that so few agents seemed to get so much of the business.