Despite Revisiting Timber Investment, SDCERA Claims No Conflict

(March 24, 2011) – Despite public relation’s claims that financial relationships were publicly revealed, the San Diego County Employees’ Retirement System (SDCERA) chief executive officer is claiming that a recent timber investment must be revisited following revelations that potential conflicts of interest were not disclosed.

When asked, on March 21, whether investment officer Loren de Mey “knew of potential conflicts – arising from [outsourced chief investment officer] Salient Partners doing past deals with Molpus [Woodlands Group],” and “if so, was it reported to the Board?,” SDCERA spokesperson Johanna Schick told aiCIO that “at the Board meeting, it was noted that Salient Partners had worked with Molpus for several years and that Salient was not involved in sourcing the investment the Board was considering.”

However, following the revelation of existing ties between Salient and Molpus on March 18, SDCERA CEO Brian White penned an email to fellow board members, claiming that legal council “Steve [Rice] believes that investment counsel and others should have brought this issue up during the due diligence process so that it could have been addressed proactively with the board.” According to SignonSanDiego.com, White did not disclose the partnership between Salient and Molpus in written materials provided to the board or during discussions preceding the vote.

The controversy revolves around potential conflicts between the outsourced CIO, advising the pension fund on what investments it should allocate capital toward, and the financial interests of that outsourced CIO. In this case, Salient has, in the past, had a financial interest in Molpus funds – and SDCERA, advised by Salient, now plans to invest $50 million with Molpus. And, while the public face of SDCERA claims that “Salient’s investments with Molpus are completely unrelated to those SDCERA has made and their investments were closed a number of years ago, before (Salient CIO and SDCERA outsourced CIO Lee Partridge) joined Salient,” fund CEO White has publicly admitted that legal council “Steve [Rice] believes that investment counsel and others should have brought this issue up during the due diligence process so that it could have been addressed proactively with the board.”

The Salient investments in Molpus are years old, SDCERA’s Schick asserts via email. “Salient has no direct or indirect financial interest in Molpus Woodlands Fund III,” – the fund that SDCERA plans to invest in – “nor will they financially benefit from SDCERA’s investment in Fund III. SDCERA has obtained Molpus’s written confirmation of the fact that Salient has and will have no direct or indirect financial interest in Woodlands III, will receive no remuneration, and will have no co-investment rights.” Yet, SDCERA will revisit the allocation, as per CEO White’s statements.

This is not the first potential controversy to encompass the San Diego fund. Most recently, internal emails suggest that there exists confusion surrounding the roles of the external portfolio strategist – Partridge and SDCERA – and acting internal CIO Lisa Needle. “If I’m not, or the CIO isn’t, managing the investments on a daily basis, then who is?,” wrote SDCERA’s acting CIO Lisa Needle in an email to CEO White. “Must be the Portfolio Strategist, since it cannot be anyone else on staff.” Publicly, however, both Partridge and SDCERA deny that confusion existed.

Previously, former CIO David Deutsch resigned in March 2009 after the fund lost more than $2 billion during the economic downturn. Since then, the plan hired Needle as an interim CIO and Lee Partridge, who was previously employed by the Teacher Retirement System of Texas, as external CIO meant to supplement the fund’s investing expertise. The board hired Partridge as an outside contractor with a contract worth up to $4.5 million and stipulations that he would be unable to direct staff, a structure that circumvented civil service salary limitations.