Is Canada home to its own version of the NY Common Fund scandal?

The scandal at the New York Common Fund has turned up its first conviction, with a $12 million securities fraud penalty being assessed against Barrett Wissman. In March, New York Attorney General Andrew Cuomo brought a 123 charge indictment against the former NY state comptroller’s top political consultant and the chief investment officer of the pension fund.

For weeks, the U.S. mainstream media showed little interest in the affair, despite the fact that the US$122 billion NY pension fund was involved, and some of the names being tossed around included Carlyle and funds associated with the Hunt Family. In a real statement about the currency and impact of blogs, peHub’s Daniel Primack has done some fabulous researching and reporting over the previous weeks. And now the New York Times has picked up the baton:

The S.E.C. complaint brought against the Hevesi aides last month said that a hedge fund manager affiliated with HFV, then identified only as “Individual A,” paid Mr. Morris “in exchange for causing the Retirement Fund to expand its investment portfolio to include hedge funds” and to make the Hunt fund one of the first to attract state money.

The latest court filings make clear that “Individual A” is Mr. Wissman.

Mr. Wissman’s guilty plea is specifically related to his role in facilitating pension investments for Access Capital, a European company that markets a so-called fund of funds — an investment fund that invests in a variety of private equity firms.

According to new court filings released on Tuesday, Mr. Wissman helped Access win more than $500 million worth of business from the New York State pension fund and was rewarded with $1.5 million in fees. But according to the felony complaint, he misrepresented to Access how he was getting the business.

Why does this matter to you? Here’s the question: is this happening, in some fashion, here in Canada? The question of paying for access to pension funds may not be the right one in a Canadian context, but there certainly is a question about the propriety of a third party advisor to Pension Fund XYZ also secretly charging a fee to the Buyout/Venture/Debt Fund or public securities money manager after the fund manager in question has secured a mandate from the Pension Fund XYZ, the client of the third party advisor.

Although $500 million alternative asset allocations are unusually large for most Canadian-based pension plans, the size of many public market mandates would surprise you. A generic $5 billion pension plan with a 60% allocation in public equities is doling out $3 billion to perhaps four or five money managers. Although the fees to manage this type of program aren’t in the Carlyle “2+20” mode, there is enough cash sloshing around to make anyone blush. And pay a “commission” of sorts to the advisor who picked you for the new mandate.

The form of commission may not be as obvious as the NY Common Fund, which looked to use the trickle-up model that we saw on The Sopranos. But if your money management firm is cajoled into placing regular stock trades with the brokerage arm of the third party pension fund advisor, is that a “commission” for the mandate, or does that fall into the camp of “sometimes a cigar is just a cigar”?

And what does Pension Fund XYZ know of the post-mandate-award trading relationship between their advisor and their money manager, and when did they find out? That’s likely the key. It appears the S.E.C. is focused on the lack of transparency about the commissions, as paying a finders’ fee is entirely legal.

The pension fund staff that I have come to know in Canada over the years are some of the most honest people you’ll ever meet in your life. They take their duties as seriously as anyone in business, and ethics are as important to them as financial returns. Even the appearance of a conflict of interest will get you thrown out of the room.

Any pension fund advisor will want to think carefully about the perceptions created if you are doing meaningful business with your client’s money managers or buyout funds, and you’ve neglected to inform your Pension Fund client. And if you appeared to favour those firms that generated additional revenue for you, Andrew Cuomo’s successful prosecutions may eventually get the attention of our regulators here at home.

It would be easy for Susan Wolburgh Jenah, President and Chief Executive Officer of the Investment Industry Regulatory Organization of Canada (IIROC), to get started on this issue. A simple industry questionnaire would allow IIROC to quickly determine which money manager does business with which pension fund advisors.

If AG Cuomo’s speed is any guide, IIROC could get to the bottom of the matter in the space of a few weeks. Isn’t “transparency the best disinfectant“?

MRM