Dispute over private equity capital call is catalyst for hearing before state's Supreme Court
Updated with correction
The South Carolina Supreme Court was the stage for a five-day battle between the South Carolina Retirement System Investment Commission and state Treasurer Curtis M. Loftis Jr.
Relations have been taut for months between the commission, which is responsible for investment of the Columbia-based $26.6 billion retirement system, and the treasurer, who is the system's custodian and controls the flow of assets into and out of the fund. He is the only elected member of the investment commission.
The state's highest court ultimately dismissed the investment commission's April 11 petition to “permanently enjoin” Mr. Loftis to “perform and comply with his ministerial duties as custodian of the funds of the retirement system,” as well as to fund a capital call for a private equity investment, according to court documents.
But the acrimony between Mr. Loftis, the other six commissioners and investment staff spilled over into the next week to the commission's April 23 board meeting, according to discussions heard during a conference call of the meeting.
Mr. Loftis argued repeatedly during the board meeting that some of the proposed changes to the system's Statement of Investment Objectives and Policies and 2013-2014 Annual Investment Plan reports were designed to impede his ability to ask questions about the commission's investment processes.
At one point during the meeting, which was running well over schedule, Edward N. Giobbe, the commission's vice chairman, asked Mr. Loftis: “Why don't you start behaving yourself and start acting like a human being?”
The relationship between Mr. Loftis, other commissioners and system staffers “just needs to be better,” stressed Darry Oliver, the system's chief operating officer, during the meeting. “I am the COO and I am in the middle of all of this. This situation is impacting my ability to do my job.”
Just after Mr. Oliver spoke, Mr. Giobbe said he would resign on May 31 “if the relationship with the treasurer is not resolved ... there is little or no common ground between the treasurer and the commission.”
The commission went into executive session to discuss the situation and consult legal counsel.
At the center of the investment commission's petition to the South Carolina Supreme Court was Mr. Loftis' refusal to authorize a transfer of funds for an $11.7 million first capital call for a $50 million commitment made in September to Warburg Pincus XI Partners.
During a Feb. 28 commission meeting, investment commission staff and commissioners urged Mr. Loftis to meet the capital call to avoid going into default, as Hershel Harper Jr., chief investment officer, told commissioners.
Mr. Loftis said during an open session of the meeting that he would not release the funds until he received sufficient information about the Warburg Pincus contract.
The commission had until the end of the day on April 16 to fund the capital call or go into default on its obligation, according to the original April 11 petition to the court.
The court ordered Mr. Loftis to respond to the commission's petition by 10 a.m. on April 15. He did so, noting in a statement that he had authorized the Warburg Pincus funding after information he sought was provided in “sworn affidavits supplied by senior officials” of the commission.
The commission's reply to Mr. Loftis' court response on April 15 stated: “Although the treasurer has, at the eleventh hour, finally relented and agreed to properly fund the obligation based upon information which has been in his possession for many months, the prospect of this unlawful conduct remains without clarification and determination from this court that the treasurer must fund lawful investment decisions as custodian, unless able to come forward with evidence that the approved investment is palpably illegal.”
Both sides presented oral arguments before the Supreme Court in an early morning hearing on April 16 and did not rule on the case until late in the day on April 17.
Sources present in the courtroom who asked not to be identified agreed that both parties to the suit were closely questioned by the justices.
“We don't appreciate trying to referee kids in a sandbox,” Associate Justice Donald Beatty told lawyers from the investment commission and the treasurer's office, the sources reported.
“It was refreshing to hear the court discuss these important issues. I appreciate the court's energetic attention and thoughtful analysis of the issues,” Mr. Loftis said in a statement on April 16.
“We very much appreciate the Supreme Court making the special effort to hear our case on an emergency basis,” Mr. Oliver stated in an e-mail on April 16.
The five justices did not agree with the arguments of the investment commission's attorney that the original petition was not rendered moot by Mr. Loftis' funds transfer to Warburg Pincus.
“We believe the unique facts of this case render this matter moot,” the April 17 ruling said, and justices said they dismissed the case because the “entire content of the commission's petition and its attachments concern the funding” of the Warburg Pincus commitment.
Mr. Loftis, in a statement, said: “I thank the Supreme Court for their attention to this matter and their prompt decision to dismiss the petition filed by the South Carolina Investment Commission. As the custodian of the retirement systems ... I will continue my efforts to safe-keep the assets.”
Mr. Oliver, in a statement, said: “The court's decision was based on the fact that the state treasurer finally performed on April 15, 2013, the custodial task that the commission had properly requested two weeks earlier on April 1, 2013. ... We regret having to initiate this action but are very pleased that a default was avoided.”
This article originally appeared in the April 29, 2013 print issue as, "South Carolina panel tussles with state treasurer".