Fund: Merrill Lynch provided ‘defective’ investment policies

The NMI Retirement Fund said its longtime investment consultant Merrill Lynch provided defective investment policies and advice that resulted to a significant loss in the pension portfolio of retirees; amounting to almost $150 million in 2009 alone.

The Law Office of Braddock J. Huesman LLC disclosed this in a nine-page cross complaint filed by the agency against its former consultant which was hired by the Fund in 2006.

The Fund said it was in October 2003, at a time when Merrill Lynch knew or should have known that the Fund was severely under funded, that the consultant recommended an asset allocation to the board of trustees of 65 percent equities, 25 percent fixed income, and 10 percent hedge fund.

In 2007, Merrill Lynch also created and submitted for adoption by the board the investment policy statement—IPS—which is labeled as also defective.

“Merrill Lynch failed to develop and recommend proper investment strategies for the Fund that appropriately responded to the Fund’s circumstances in and after 2007,” the Fund’s lawyer said,

It added that the consultant also failed to develop prudent and appropriate strategies to preserve the Fund assets, prolong the life of the Fund, and provide for pension income to retirees and refunds to employees.

The Fund also said the former consultant negligently failed to accurately measure the risks of circumstances that could cause the Fund to deplete its assets.

“On information and belief that it is alleged that the Fund initially lost almost $150 million—in excess of 25 percent of its capital [from Sept. 16, 2008 to March 9, 2009],” said the Fund, adding that it was not able to recover the said losses even when the markets began to recover.

The Fund labeled also as “unlawful” the fees and revenues collected by Merrill Lynch after finding out that the company was not properly licensed in the Commonwealth. It claimed that the firm has never held CNMI business license and only obtained it in 2005 which violated the procurement regulation. Because of this, the Fund asked that the “Consulting Services Client Agreement” with the company be voided.

Because it received compensation in “soft dollars” up until at least end of June 2009, it was alleged that this created a conflict of interest. “Soft dollar” compensation is based on trade commissions that exceeded the compensation it would receive under a “hard dollar” arrangement.

Merrill Lynch ended its service with the Fund in October 2010 and was replaced by Wilshire Associates. The former consultant advised the Fund board on longterm investment strategies; allocation of assets; types and extent of long-term risks the Fund should be exposed to; management of risks; and the selection, monitoring and retention of outside investment managers.

The Fund revealed that it did not advise the board on the purchase, sale, or valuation of specific securities or buy or sell securities.

The Fund cited five charges in its complaint against the investment consultant: breach of trust; breach of fiduciary duty; negligence; malpractice; and unjust enrichment.