Kentucky auditor finds no ‘pay to play’ activity

Kentucky Retirement Systems underwent a review by the state auditor over its use of placement agents.

Officials for the $13 billion Kentucky Retirement Systems did not engage in pay-to-play practices according to a review by Kentucky state Auditor Crit Luallen.

The audit found that the pension’s former CIO Adam Tosh failed to disclose the use of one placement agent in violation of the pension’s disclosure policy, according to a report released by the auditor. However, no evidence of “pay-to-play” activity was found.

“Based on the information they reviewed, auditors saw no evidence of a pay-to-play scheme involving placement agents, or of conflicts of interest that benefited KRS officials; nor is there evidence that KRS incurred any additional cost through the use of placement agents,” Luallen said in a statement. “We followed up every issue that was raised and could not substantiate any specific evidence of wrong doing,” Luallen said.

The state audit followed an internal audit by the pension last July showing that Tosh used Glen Sergeon as a placement agent.

The pension found that Sergeon, working with three different firms called Diamond Edge Capital Partners, Bleecker Street Partners and Cazanave, secured six investments worth $426 million for private equity managers from the pension and was paid nearly $6 million in fees.

Sergeon and Tosh worked together on a global emerging markets strategy when Tosh was CIO at the Pennsylvania State Employees' Retirement System, according to the audit. It's not clear who Sergeon worked for at the time, but he formerly worked as director of public fund marketing for the US institutional effort of Merrill Lynch Mercury Asset Management.

Tosh resigned as CIO last June to join investment consultant RogersCasey in Connecticut.

The state audit found that the use of placement agents was not transparent at the pension system, but there was no evidence of wrongdoing. However, there were instances where the board could improve accountability, transparency and communication.

The auditor recommended that all information required by the placement agent disclosure policy be presented to the pension board in a clear and transparent manner; that a specific party within the pension be designated for obtaining placement agent information from investment managers; and the disclosure statement include political contributions made to Kentucky officials within the past two years.