Joining Other States and Cities, Detroit Feels the Placement Agent Scandal

(December 26, 2010) – Add the city of Detroit to the long list of American public entities concerned with investment losses tied to the recommendations of middlemen.

According to the Detroit Free Press, two city pension funds – one designated for police and firemen, the other for various municipal employees – have lost upwards of $2 billion combined, or 27% of total assets, since 2008. This figure includes $480 million in write-downs on alternative assets. Assets and investments that have had to be written off or down include a Pittsburgh-based casino, Texas real estate, and an affordable housing plan.

According to the Free Press, the Securities and Exchange Commission (SEC), the Federal Bureau of Investigations, and a federal grand jury are all looking into many of the failed deals. Also under scrutiny is the role of investment consultant North Point Advisors and its co-founder and CEO Adrian Anderson, who performed due diligence for the funds on deals that lost over $270 million in the past two years.

In addition to the failed deals and investment consultant, alleged placement agents – middlemen who receive payment in return for access to capital pools such as public pensions – also are being investigated. One notable failed placement was with private equity firm Onyx Capital Advisors, which has been charged by the SEC with stealing millions in pension money obtained via placement agents and possibly through a payment to a fund tied to then-Mayor Kwame Kilpatrick.

Detroit is far from the first public entity to be touched by alleged abuses in obtaining access to and investing on behalf of public pension plans. New Mexico, California, and New York, to name a few, have had similar problems – with the Empire State seeing the jailing of their former State Comptroller and others in a wide-ranging investigation into public pension abuses.