carousel_imageIn the last few months, there has been increasing pressure on public officials to stop hiding the basic terms of the investment agreements being cemented between governments and Wall Street’s “alternative investment” industry.

That pressure has been intensified, in part, by two sets of recent leaks showing how these alternative investment companies (private equity, hedge funds, venture capital, etc.) are using the secret deals to make hundreds of millions of dollars off taxpayers. It is also in response to the Securities and Exchange Commission recently declaring that many of the stealth schemes may be illegal.

And yet, as the demands for transparency grow louder, a potentially precedent-setting push for even more secrecy is emerging. Pando has learned that legislators in North Carolina — whose $86 billion public pension fund is the 7th largest in America – are proposing to statutorily bar the public from seeing details of the state’s Wall Street transactions for at least a decade. That time frame is significant: according to experts, it would conceal the terms of the investment agreements for longer than the statute of limitations of various securities laws.

In other words, the legislation – which could serve as a model in state legislatures everywhere – would bar the disclosure of the state’s financial transactions until many existing securities laws against financial fraud become unenforceable.

A growing scandal in North Carolina

If the North Carolina Retirement System and its sole trustee, Treasurer Janet Cowell (D), seem familiar to tech readers, that is because the NC system is one of the lead plaintiffs in the class action suit surrounding Facebook’s initial public offering. Additionally, as part of her career in the financial sector, Cowell was the marketing director for the tech-focused VC firm, SJF Ventures.

Like other states, North Carolina has been redacting and/or refusing to release the contractual terms of its pension fund’s massive Wall Street investments, even though the contracts involve public money and a public agency. In recent months, that practice exploded into a full-fledged political scandal when the State Employees Association of North Carolina released a 147-page report from former SEC investigator Ted Siedle.

The report asserted that under Cowell, up to $30 billion of state money is now being managed by high-risk, high-fee Wall Street firms, and that the state could soon be paying $1 billion a year in fees to those firms. The report also noted that the investment strategy “has underperformed the average public plan by $6.8 billion” and it alleged that Cowell has misled the public about how where exactly she is investing taxpayer dollars. The union has called for a federal investigation, while Cowell has publicly denied the allegations.

Following the report, (SEANC) is now pushing the legislature to adopt a simple two-page bill that would force the Treasurer to open up the state’s books so that taxpayers and public employees can at least see how their money is being invested. In response, Cowell sprung into action against the transparency initiative and on behalf of the financial and securities industries that have given her election campaign committee more than $250,000 since 2008.

First, in an email obtained by Pando (embedded in full below), Cowell’s office told legislators that the transparency bill would violate previously undisclosed contractual provisions that Cowell agreed to. Those officials claim that “losses as a result of the breaking of these contracts is $1.8 billion.” Put another way: Cowell asserted that, unbeknownst to lawmakers and the public, she had already signed North Carolina taxpayers into secret deals with Wall Street firms – deals that allegedly aim to financially punish taxpayers if the public is ever permitted to see the details of the agreements.

At the same time, Cowell’s allies in the legislature filed a bill to serve as a replacement for the transparency legislation. Upon that replacement bill being introduced, Cowell issued a press release endorsing it. Proposed only days before the SEC sounded the alarm about a lack of transparency in the private equity industry, Cowell’s legislation claims to be about transparency, but weaves in provisions that seem designed to enshrine the exact opposite.

Specifically, section 3(b) of the proposal says that if Wall Street firms demand secrecy, the law will automatically bar the public from viewing key information about public pension investments for 10 years after the investment is terminated. That includes, according to the bill draft,  “information regarding the portfolio positions” of public pension fund investments; “capital call and distribution notices” sent to state pension officials by investment firms; investment firms’ “private placement memorandum and other offering and marketing material”; and, perhaps most important of all, “the investment’s contractual documents.”

According to the North Carolina House’s website, two of the lawmakers sponsoring the bill currently work in the financial industry – one is described as a “financial consultant,” the other is described on the website as “Vice President & Investment Officer – Wells Fargo Advisors.” The State Treasurer’s 2013 report notes that Wells Fargo does brokerage business with North Carolina’s pension system. Additionally, documents from the North Carolina Secretary of State’s office (embedded below) show at least 22 financial firms and securities industry trade associations have registered lobbyists in the state capitol.

A license for Wall Street malfeasance

Critics argue that the bill is a license for Wall Street malfeasance because its 10-year secrecy mandate appears to exceed the statute of limitations of many state and federal securities laws.

For instance, the North Carolina Securities Act includes language outlining a three to five year statute of limitations. Similarly, a law firm specializing in securities work and a North Carolina insurance firm both point out that the statute of limitations in securities fraud is well shorter than the 10 year gag order being proposed by North Carolina legislators.

Meanwhile, the Securities Fraud and Investor Protection Resource Center reports that the federal law’s statute of limitations is “not more than five years after the fraud occurred.”

All of this means that if the secrecy bill passes, and if violations of existing securities laws are then uncovered only after the 10-years secrecy period, there may be no way for taxpayers and retirees to seek legal recourse. In short, Wall Street firms would potentially be able to bilk the pension fund knowing that the public would be statutorily barred from seeing what’s happening until it was too late to seek redress under state and federal law.

A possible precedent-setting move for secrecy

In recent years, states and cities have been moving more money into high-fee alternative investments – up to $660 billion by one estimate. With that kind of cash on the line – and with leaked documents and the SEC raising questions about the propriety of such investments – unions and watchdog groups like the American Civil Liberties Union and Common Cause have become more aggressive in demanding basic transparency.

The bill in North Carolina, however, may represent a precedent setting escalation in the fight against such transparency. Indeed, whereas most states up until now have relied on discretionary executive branch decisions and Attorney General opinions as a justification for secrecy, North Carolina is attempting to statutorily mandate secrecy through bill language that could easily be replicated in states across the country.

As one example of how that could happen, consider the Wall Street-aligned American Legislative Exchange Council. That conservative group works in legislatures all over America and, according to the Center for Media and Democracy, the organization’s economic task force works closely with the trade group representing the banking industry.

Additionally, North Carolina’s House Speaker Thom Tillis (R) – whose fellow Republicans are backing the secrecy bill – has been both a board member of ALEC and has received large campaign contributions from the financial sector. Indeed, data from the Institute on Money In State Politics show that 20 percent of his entire campaign fund in 2012 (or more than $345,000) came from the Finance, Insurance & Real Estate industries. That is on top of the more than $47,000 he has received from the securities industry in his current run for U.S. Senate.

Cowell argues the 10-year secrecy provision is designed to promote transparency

In an emailed statement, Cowell’s spokesperson, Schorr Johnson, rejected the notion that the legislation increases secrecy. He told Pando the Treasurer supports the 10-year secrecy provision “because it provides additional transparency.” He said:

For many years, North Carolina law has allowed vendors doing business with the State to designate as confidential their commercially valuable methods, techniques and processes. Currently, that designation is permanent. The bill places a sunset on the confidentiality of investment contracts, while making all information in them available to the General Assembly and the State Auditor at any time, even if that information is not public record.  This important provision will provide transparency and accountability for active contracts while maintaining the integrity of proprietary and confidential private-sector information.

Johnson did not mention that rather than using the state’s financial leverage to reject Wall Street firms’ proposed confidentiality provisions, the North Carolina government presumably chose to agree to those provisions when signing investment agreements. Additionally, because the agreements remain secret, there’s no way to verify that the investment contracts do, in fact, mandate such strict confidentiality.

In response to Johnson promoting the 10-year secrecy provisions as pro-transparency, Siedle said: “Disclosure long after criminals can be held accountable for stealing workers retirement savings is not transparency, it’s a very bad joke.”

SEANC spokesperson Toni Davis said: “Essentially the Treasurer is saying her proposed secrecy is slightly less secret than permanent secrecy. That shows how tone deaf she is on this issue. The public cares about what politicians want to hide from them.”

Meanwhile, Jeff Connaughton, a former investment banker, congressional staffer and author of “The Payoff: Why Wall Street Always Wins,” told Pando that secrecy surrounding public investments should raise public suspicions and that it was not clear how texts of contractual agreements with public agencies can even be considered “proprietary.”

“If we’re talking about a trading algorithm or a trade secret, that’s one thing, but if they’re shielding the terms of the basic deal or investment, why shouldn’t the public be able to see exactly how the state is investing its money?” he said. “Public officials should have to defend their investment strategies and the associated fees.”

He added that transparency is especially crucial now because, he says, government agencies cannot be trusted to police financial shenanigans on their own.

“The cost of bad behavior has gone to zero,” he said. “There’s no effective law enforcement and the culture is totally out of control. Considering that, there shouldn’t be a star chamber where (public investment) decisions are being made in secret when those decisions affect so many retired employees in such a potentially dramatic way.”

On Thursday, Pando contacted North Carolina House Speaker Tom Tillis and all four of the North Carolina legislators sponsoring the secrecy legislation. We also contacted representatives of the North Carolina Financial Services Association for comment. None of them responded to the requests for comment.

Email from the office of Janet Cowell:

From: Anthony Solari [REDACTED@nctreasurer.com]
Sent: Tuesday, May 27, 2014 7:44 PM
To: Lisa Kennedy (Rep. Tim Moffitt); Rep. Mitchell Setzer; Joanna Hogg (Rep. Linda Johnson); Rep. Tim Moore
Cc: Emily Wilson (Speaker Tillis’ Office); Rep. Stephen Ross; Rep. Nelson Dollar; Rep. Rick Glazier; Rep. Thom Tillis (Speaker)
Subject: Investment bill

Dear Reps  Moore,  Moffitt,  Johnson and Setzer:

I am writing you as a primary sponsor of house bill 1237. “Retirement Investment Transparency”.  The Department of State Treasurer is diametrically opposed to this legislation.  Our investment professionals tell me that the bill has serious issues on a number of fronts:

First. It would cause a breach of contract between the department and our partners.  The contracts we sign have specific clauses dealing with proprietary and confidential information that your legislation would force into the public record.  I am told that were this legislation to be enacted our counterparts would immediately enact clauses specifying damages to their interests, clauses that would prevent us from doing business with them.

Furthermore, staff tells me that an initial and admittedly rough estimate of losses as a result of the breaking of these contracts is $1.8 billion — a figure that does not include penalties and fees charged against us.

The legislation would force us out of a very lucrative set of investments that have reduced risk to the portfolio and which have resulted in excellent returns.  The result would be added risks that no prudent fiduciary would want to assume and especially not under these circumstances.

The bill would undermine the integrity of a very successful public pension fund investment operation and put the investment returns at serious risk.

I would like to bring Kevin Sigrist our states chief investment officer and Blake Thomas our legal counsel to speak with you at the earliest possible time. They will be able to explain just what damage this bill would do in more detail than i can here.

Might I suggest that instead of pursuing this legislation you consider becoming a co-sponsor of Rep Dollar’s house bill 1209 “Retirement Investment Accountability.”  This bill – which is the product of a thoughtful and thorough process that looked at this issue —  would achieve the goal of improved transparency and accountability that you seek to achieve.  But it would do so in a way that would protect the confidentiality of contracts and not undermine the integrity of our states’ investment portfolio.

We will be reaching out to meet with you and ask to do so as soon as is possible

Thank you.

NC-HB1209