Kentucky Retirement System Continues to Insist There’s Nothing to See Here

On what seems to be a sadly recurring basis, news reports surface on the Kentucky Retirement System. Real estate deals with inexplicable and huge short-term bumps in property value, millions in unnnecessary fees to friends of those charged with the public trust of operating KRS, and always with the clear concern that the KRS officials are directing deals towards those who are in a position to split the profits with them. The result is hundreds of millions of dollars in lost return that could have been achieved by simply using “dead hand” investing in index funds that match the market index rates. Then, KRS comes to the legislature and declares that there is not enough funding for the system, after having lost hundreds of millions through questionable investments done through friends in a position to abuse the public trust.

The most recent example of Mike Burnside declaring there is nothing to see here, and no wrongdoing, is in John Cheve’s latest:

Companies doing business with the state pension system have paid nearly $13 million in fees since 2004 to “placement agents,” middlemen who bring private investment deals to the pension program, according to an internal audit released Thursday.
Although highly paid placement agents with political connections have led to recent scandals involving New York and California’s state pension funds, officials at the Kentucky Retirement Systems, or KRS, said there is no sign of “pay-to-play” problems here.
But the audit revealed a previously existing relationship between placement agent Glen Sergeon, who made nearly $6 million in seven separate Kentucky pension deals, and Adam Tosh, who resigned last month as the chief investment officer for KRS.
Sergeon and Tosh worked together years ago on market strategies when Sergeon was with Merrill Lynch and Tosh handled investments for Pennsylvania’s pension fund. During an interview with KRS staff as part of the audit, Sergeon disclosed their previous relationship.
“Due to this prior working relationship and the continuous use of Mr. Sergeon, there could be a perceived appearance of preferential treatment,” the audit report said.
Sergeon came under particular scrutiny in the audit because he so frequently surfaces as a placement agent in Kentucky pension deals, KRS officials said.
Placement agents are third-party operators, employed neither by the pension system nor the investment company. Their fees are paid by the investment company, which then gets millions of dollars in continuing management fees from the pension system.
The report recommended that KRS investment staff should disclose all of their connections with placement agents. The KRS enacted a policy for placement agents last year requiring disclosure of their names and fees, as well as any payments they make to current or former KRS or Kentucky elected officials.
State pension deals must be transparent, but following a thorough examination, no evidence of wrongdoing was found, KRS executive director Mike Burnside said. Tosh quit the KRS to accept a job in the private sector, not because of anything disclosed in the audit, Burnside said.
Tosh, now a managing director at Rogerscasey investment firm in Darien, Conn, said Thursday that he worked with Sergeon on a limited basis in Pennsylvania. Their only face-to-face encounter was a three-hour meeting in 2004, Tosh said. He didn’t see Sergeon again until he took the Kentucky job, he said.
“He called on us like any other salesman,” Tosh said. “He brought us a lot of good deals.”

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