SEC Subpoenas Kentucky Pension Officials

(October 12, 2011) — The US Securities and Exchange Commission (SEC) is investigating officials at the Kentucky Retirement Systems (KRS), which manages about $14 billion in assets for retirement programs for about 330,000 active and retired employees of state and local governments.

According to Kentucky’s Courier Journal, the federal agency sent subpoenas last week to one current and two former staff members to attend depositions. The US regulator told attorneys for the retirement systems that it wants to talk to all individuals who have served on the KRS board of trustees since 2007.

William Thielen, interim executive director of Kentucky Retirement Systems, told the newspaper that the subpoena for the current staff member — whom he declined to identify — ordered a deposition on October 25 in New York City, adding that in total, the SEC aims to speak with about 15 people, including board members.

To date, the SEC has revealed that they are solely interested in the use of placement agents.

In June, while an audit of KRS found no evidence of pay-to-play activity, “troubling aspects” regarding the use of financial middlemen that connect money managers with pensions, known as placement agents, were revealed. According to an audit by Kentucky Auditor Crit Luallen, no evidence of “pay-to-play” activity at the scheme was found. Nevertheless, Luallen recommended 92 items for improving the system, urging greater oversight.

Luallen’s staff spent months probing into the role of placement agents, and found nearly $11.6 million in fees paid or committed to placement agents from 2007 to 2010. The report discovered that New York placement agent Glen Sergeon had “an unusually close working relationship” with Adam Tosh — the former chief investment officer at KRS and the current managing director at consulting firm Rogerscasey. Sergeon was involved in seven of 13 of the system’s investment agreements in which placement agents were used in 2008 and 2009. Additionally, the audit discovered that Sergeon “appears to have acted as a representative of KRS, setting up appointments and making travel arrangements” for Tosh.

“Based on the information they reviewed, auditors saw no evidence of a ‘pay to play’ scheme involving placement agents, or of conflicts of interest that benefited KRS officials; nor is there evidence that KRS incurred any additional cost through the use of placement agents,” Luallen said on June 28 in a press release accompanying the audit. “However, the audit points to several troubling aspects regarding the use of placement agents and will be referred to the SEC. The SEC has the authority to determine if further investigation is needed in Kentucky.”