Pensions, kick-backs and ambushes

The Oklahoma Teachers' Retirement System, worth approximately $7 billion, was guided into private equity investing in September 2008 by Aldus Equity, a Dallas-based financial adviser which has worked with several US public pensions.

The pension, which deems itself “conservative” and “old school”, now finds itself smack in the middle of a kickback scandal involving the third-largest public pension in the US and which has repercussions all the way up to the administration of US President Barack Obama.

The entry of Oklahoma Teachers into private equity stemmed from its search for diversification. Private equity was viewed as an asset class “mature” enough for the pension, according to its executive secretary James Wilbanks.

“We saw some value in diversifying into some alternative areas,” Wilbanks says. “The teachers are conservative by nature … some public funds in Oklahoma have been in private equity for 15 years. We're never going to be an entity that would be an early adopter. We'll always reflect some of that conservatism.”

“We have no hedge funds, and that's served us well in the financial crisis,” Wilbanks says. “We know day-to-day how much money we've lost, and there's some comfort in that.”

Aldus partner Matthew O'Reilly educated the pension's investment committee about private equity and the opportunities the asset class provided, according to minutes from the pension's board meeting last August.

According to one passage in the board's minutes from August 2008: “A due diligence search had been performed on Aldus and there was nothing disclosed that would cause any concern for character, of either the entity or people involved with Aldus Equity.”

Oklahoma's target allocation to private equity is about $445 million, or roughly 5 percent of the fund. To date, the pension has committed almost $100 million to the asset class, of which about $12 million has been called, Wilbanks says.

Oklahoma Teachers “put Aldus on alert” in February after learning that executives from the firm were departing to start their own firm. Later in February, when the pension learned that Aldus played a role in the kick-back scandal, Oklahoma Teachers had “put Aldus on notice”.

At the time of going to press, the pension's board was planning to hold a meeting imminently to determine the fate of Aldus Equity, which has been haemorrhaging clients since its founder, Saul Meyer, was indicted in connection with a kick-back scheme in late April. The $122 billion New York State Common Retirement Fund and the $11.5 billion New Mexico State Investment Council fired Aldus in April, and Denise Nappier, Connecticut State treasurer, terminated the firm's contract in early May. Connecticut's pension stands at about $20 billion.

New York Attorney General Andrew Cuomo has charged four people in connection with the scandal, including Henry Morris, a former political operative with former New York Comptroller Alan Hevesi. The former chief investment officer of New York Common, David Loglisci, was also charged.

Other Aldus clients, including the Louisiana Public Employees' Pension, and the Los Angeles Fire and Police Pension, are reviewing their relationships with Aldus and may choose to terminate their contracts with the firm.

The US Securities and Exchange Commission (SEC) charged the firm itself in a civil complaint in connection with the scheme. An attorney for Aldus called the SEC charges “careless” and accused the government agency of making the charges without running a full investigation.

“The charges in the government's public statements and filings are baseless. It's an ambush lawsuit,” Aldus's attorney Matthew Orwig says.

Oklahoma Teachers still has faith in private equity, despite the scandal currently rocking the industry, Wilbanks says.