Fund board fails due diligence?

We’ve gone around the block trying to figure out the Fund’s financial puzzle, slated to take its kamikaze internment in about two year’s time.

I recalled raising a flag on what the board ought to quiz in the selection of investment advisers but it fell on deaf ears. In brief, if the investment advisers were rock solid and had the requisite wherewithal to guide the Fund, would the pension be in trouble today? Is this why we opt to overlook taking critical review of their background so the Fund sinks from their ill-advised recommendations? Have we not turned them into lords because we’ve become servile to their command in view of our ignorance?

In a recent article in Forbes Magazine written by Mr. Edward Siedle, a nationally recognized authority on pensions, investment management, and securities matters, he said he was invited to deliver a stern warning to the government pension plan trustees who would be in attendance: the advice their funds were receiving from Wall Street stockbrokers posing as pension specialists was tainted by conflicts of interests that were profoundly undermining pension returns. These kickback schemes could lead to the demise of their already underfunded pensions. That was 10 years ago.

He noted that in 2002, “some savvy members of the Association for Fiduciary Studies had read about an investigation of pension adviser abuses I had recently successfully concluded on behalf of the billion-plus City of Nashville public pension fund. These members knew that public pensions in the U.S. territories in the Pacific were being similarly scammed and wanted the trustees of these funds to hear it from me-a credible expert who was objective and an outsider. After familiarizing myself with the details and concluding that the region’s public pensions were indeed being fleeced, I agreed to make the journey.

“I warned the attendees at the conference: ‘The investment consultant to a pension occupies a unique position. He is the one expert the trustees of a pension fund rely upon for objective advice on virtually any matter involving investment of the fund’s assets. The relationship between consultant and pension client is one of utmost trust and confidence. As a result of his role as an objective guide, the consultant arguably exerts the greatest degree of influence over the investment process- far more than any single money manager.’

\“Remarkably, I have witnessed pension boards accept assurances from their consultants that even the most outrageous self-dealing scenarios involving the consultant pose no danger to the fund. To the contrary, any hint or suggestion that the consultant’s ability to provide independent, objective advice may be compromised should be thoroughly examined before it is dismissed.

“I still have the business card given to me by one of the attendees after my speech, Juan S. Torres. It appears he was the former administrator of the Marianas Islands Retirement System and recently nominated to serve on the board of trustees of the fund. I have no idea whether he acted upon the information I provided in my speech but it appears that, at best, any efforts he may have made to stop the abuses related to the fund I identified, failed.

\“According to today’s Wall Street Journal, in October 2009 the retiree participants in the Fund filed a lawsuit against Merrill Lynch, the investment adviser to the Fund since the 1980s. The lawyer representing the retirees had, at the suggestion of one or more attendees at my speech, spoken with me before the suit was filed.

“Apparently the pension fund’s board of trustees refused to join the lawsuit, instead blaming government failure to make contributions and over-generous benefits as the real culprits. Let me assure you that while decades of tainted investment advice may not be the sole cause of the demise of the plan, it is, in my opinion, a leading factor. Further, it was no secret, even a decade ago, that the integrity of the plan’s investments had been undermined by adviser conflicts.

“What is happening in Northern Mariana Islands isn’t an isolated phenomena. Merrill Lynch and the lead plaintiffs in a class action involving about 70 municipal pension plans in Florida together filed a proposed settlement recently seeking to end a dispute over whether the wirehouse breached its fiduciary duties as the investment consultant to these pensions. The proposed deal, filed with the U.S. District Court of the Middle District of Florida in Jacksonville, would have Merrill pay a mere $8.5 million to the class but not admit wrongdoing. The settlement hearing is tentatively scheduled for July 16, 2012. I have estimated approximately $1 billion in Florida public pension damages related to adviser conflicts and consider the proposed Florida settlement pitiful.

“Truth be known, Wall Street has handled government pension plans every bit as shabbily as retail clients. Wall Street not only has profited at the expense of pensions participants-firm profits have been of paramount importance. As more public pensions falter and fail, forensic investigations will reveal just how badly government workers who contribute to pensions and the taxpayers who backstop these pensions have been swindled.”

But then we scrambled to absolve the firm from any liabilities, true? What if in fact it is proven that it has dealt with the NMI Fund investment with conflict of interest and other anomalies contrary to the best interest of retirees’ fate? Didn’t we take off our holster a bit too soon? I can’t help but admire the audacity of former board chairman Sixto Igisomar and Fund administrator Richard Villagomez convincing brain-dead legislators to collectively push the wrong card. What lame disposition apparently did without due diligence as to have absolved Fund investors for any inadequacies they commit. Can you quiz your experts why the Fund is bankrupt?

John DelRosario Jr. is a former publisher of the Saipan Tribune and a former secretary of the Department of Public Lands.