Auditor questions PBGC private equity selection process

The inspector general of the US Pension Benefit Guarantee Corporation said it has found improper communications between the agency’s former director, Charles Millard, and investment firms bidding for contracts to manage the agency’s $2.5bn allocation to private equity and real estate. US Congress is now investigating the issue.

The Pension Benefit Guarantee Corporation (PBGC), which funds the pensions of bankrupt companies, has hit some roadblocks on its journey into private equity investing.

In December, the PBGC hired BlackRock, JPMorgan and Goldman Sachs to mange $2.5 billion to be allocated to investments in private equity and real estate. The agency decided last February to spend a portion of its $48.4 billion investment fund on private equity and real estate investments.

But an internal audit performed after a whistleblower came forward about the selection process for private equity managers has alleged the PBGC’s former director Charles Millard may have tainted the process. The whistleblower also alleged Millard may have used the procurement process as a way to secure himself future employment with an investment firm, the report said.

Millard has flatly denied any wrongdoing and issued a written response to that effect. “I always acted in the best interests of the agency,” Millard said. “I exercised my authority and judgment in ways that were sometimes counter to staff’s wishes, and I took [on] additional work personally because I saw the need to change certain practices and to provide greater resources to an agency facing tremendous looming challenges with a limited staff.”

The audit found no “criminal activity” on the parts of the bidders.

The audit, conducted by PBGC inspector general Rebecca Anne Batts, accuses Millard of “communicating directly with some bidders at the same time that he was actively evaluating their strategic partnership proposals, a clear violation of the prohibition of contact with potential offerors”, the audit report said.

The calls were made during a three-month “blackout” period between 31 July 2008 and 31 October 2008, the audit report said.

Specifically, nine phone calls were made between Millard’s phones and Goldman Sachs, which was awarded a contract to invest up to $700 million in private equity, the audit said. Six phone calls were made between Millard’s phones and BlackRock, which won a contract to invest up to $600 million in real estate and up to $300 million in private equity. Ten phone calls were made between Millard’s phones and a managing director of JPMorgan, which won a contract to invest up to $600 million in real estate and $300 million in private equity.

Millard took an “unprecedented” role in evaluating the bids while talking to potential bidders and did not heed warnings that his actions could “cast doubt on the integrity of the procurement process”, the audit said.

The matter is being investigated by the education and labour committee of the House of Representatives of the US Congress.

Millard left the PBGC in January. He once worked as president of BP Direct Securities, a subsidiary of Broadway Partners.