Putin, Russian buddies ‘mysterious’ partners in public pension deals?
America’s state and local pensions invest up to 40 percent of their wealth in secretive, “alternative” offshore hedge, private equity, real estate and venture funds, which warn that certain unidentified “mystery investors” are lowering fees pay for investment strategies and portfolio holdings, they have been granted liquidity preferences and they achieve superior net performance – all at the expense of America’s public sector workers. How many wealthy Russians are “mysterious investors” in these annuity deals that criminals and foreign adversaries regularly use to launder money, according to an internal FBI document leaked last year? Wall Street refuses to say so, and public pensions have promised not to ask. Ironically, the invasion of Ukraine and calls to dump Russian investments to punish the country draw attention to the ugly fact that America’s public pensions have long been content to be kept in the dark by Wall Street, thereby their duty to monitor and safeguard workers’ pensions is overridden.
America’s state and local pension systems currently manage over $5.5 trillion in public pension fund investments, most of which are held by states. While more than half of these assets are invested in traditional stocks, bonds, and cash, I estimate that about 40 percent are invested in so-called “alternative” investments such as private equity, hedge funds, and real estate funds.
(According to the National Association of State Retirement Administrators, about 27% of public pension assets are invested in alternative investments — if you believe the self-reported data.)
As I discuss in my book, Who stole my pension? My forensic research consistently shows that public pensions hide and underreport their riskiest assets. While certain hedge, private equity and venture funds can be labeled as alternatives, other alternatives such as real estate, precious metals, commodities, distressed debt, infrastructure, inflation-linked bonds and credit opportunity funds can be misleadingly categorized.
For example, my second investigation of the Rhode Island state pension in 2015 found that contrary to the pension’s financial reports, 40 percent of the pension’s investments — not the disclosed 25 percent — had been allocated to secret alternative investments.
Public pension plans have shifted funds away from low-risk fixed income assets, such as government and high-quality corporate bonds, over the past few decades and have increased their reliance on equities to boost their investment returns. Over the past 15 years, fixed income has increasingly turned to alternative investments that Wall Street promises will offer superior performance and diversify investment portfolios. To date, alternative investments have not delivered the promised enhanced performance or diversification.
On the other hand, there’s no question that the shift to more complex investment vehicles has led to exponentially higher asset-based fees being paid to Wall Street. Additionally, annuities pay billions of dollars in unreported benefit fees associated with these alternative investments.
Alternative investments are also far less transparent than traditional equity and bond portfolios. While America’s public pensions are said to be the most transparent in the world — subject to public scrutiny through state freedom of information laws — as I explain in my recent forensic investigation of Ohio’s State Teachers Retirement System, alternative investment managers have consistently refused to play with the rules governing those pensions and have thwarted public scrutiny instead of championing transparency.
Because of this lack of transparency – the failure to provide investors with prospectuses and other key investment information – retirees and taxpayers in general are unaware of widespread unsavory business practices in the alternative industry.
Pensions can’t dump Russian investments they don’t even know they own
As I detailed in my forensic investigations into North Carolina and Rhode Island state pensions nearly a decade ago, the offering documents of most alternative funds reveal that investors, like state pensions, agree to allow fund managers to make full and timely Refusing to disclose material information about bond investments in their funds. In the words of one manager, investors “have no objective means of evaluating their operations or determining whether they are being followed…nor may investors have the ability to verify investment positions.” Shockingly, pension trustees have agreed to be kept in the dark , and shied away from their duty to monitor and protect pension wealth.
Today, as calls for public pensions to dump Russian investments to punish the country for invading Ukraine mount, the sad truth is that most public pensions have no idea if their alternative investment funds are invested in Russia. They have agreed to allow these Wall Street executives to operate in secret.
Putin and Russian oligarchs “mysterious” investors?
Worse, annuities have agreed to grant alternative investment fund managers absolute discretion so certain mystery investors can pay lower fees, get more information about investment strategies and portfolio holdings, have liquidity preferences, and achieve superior net performance – all at the expense of America’s public sector workers . Managers are under no obligation to disclose such arrangements to pensions. For this reason, the fund managers expressly warn that pensions are at risk that other unknown investors could benefit at their expense.
The absolute discretionary pension granted to certain managers is like a license to steal… from the state pension. Finally, the documents offered often warn that alternative funds’ confidentiality policies may violate applicable laws.
Why on earth would a statutory pension consent to rights violations? Credit Wall Street salesmanship coupled with the incompetence of the public pension system.
So who are these “mysterious investors” whom America’s public pensions allow—God knows why—to profit at their expense? We don’t know because Wall Street won’t say and public pensions have agreed not to ask. However, we know that these mysterious investors are given preferential treatment because of their wealth and power. Wealthy Russians are almost certainly in the mix.
FBI warns against foreign money laundering in alternative funds
It’s no secret that the FBI suspects that many alternative investment vehicles are used extensively to launder money. In 2019, the FBI produced a report entitled “Threatened financial crime actors are most likely laundering illicit proceeds through fraudulent hedge funds and private equity firms to conceal illicit proceeds.” Then a Leaked internal FBI report as of May 1, 2020 similarly titled “Threat Actors Likely to Use Private Investment Funds to Launder Money and Bypass Regulatory Tripwires” is intended to complement the January 2019 report “by providing up-to-date accounts of hedge funds and private equity firms being used to launder illicit proceeds and expanding the threat context beyond financial threat actors to include foreign adversaries.”
The FBI claims with “high confidence” that such investment vehicles make it easy for criminals and foreign adversaries to launder money. For demonstration, the FBI writes:
Hedge funds and private equity firms receive funds from companies incorporated in countries that have laws conducive to concealing underlying beneficial ownership, making it more difficult for US financial institutions and regulators to determine the source of funding. Additionally, hedge funds and private equity firms have been used to facilitate transactions in support of fraud, cross-border crime and sanctions evasion.
For nearly two decades, I have argued that the blatantly abusive business practices and confidentiality policies outlined in alternative fund offering materials mean that these state pension investments are at least inherently unacceptable, if not illegal.
Yet public pension investment in alternative investments has doubled in recent years, and billions of public pension assets across the country are currently at risk from such schemes. Ironically, the Russian invasion of Ukraine has drawn attention to the dangers associated with Wall Street’s secrecy programs and the need for an immediate, targeted response from securities regulators and law enforcement agencies.
Public pension stakeholders should demand to know the identities of any mysterious investors who may be allowed to profit at their expense, and any relationships between those investors and elected officials. Better yet, your state pension shouldn’t even consider investing in any business that warns “mysterious” investors that they’re profiting at your expense.