After losing more than half of its pension fund through a phony investment scheme last year, the Chicago Housing Authority has sent out a request for proposals for an outside plan administrator to take over the $22 million that is left.
What's more, the CHA was gearing up to release a second RFP for a consultant just before press time.
The CHA is looking for a large financial institution that could handle all administration and investments. The administrator will be the fiduciary, will decide the investment strategy for the fund and will allocate assets. All investments will be managed by the administrator.
About 10 prospective bidders attended a pre-bid conference held in late July, said Marilyn Johnson, CHA general counsel. She wouldn't name them.
Last summer, about $16 million of the plan's assets were diverted through an investment scheme involving bogus "prime bank instruments" that were allegedly issued by large financial institutions. Following an investigation, an agency oversight committee recommended the CHA hand the pension fund responsibilities over to an outside plan administrator. Before the $16 million loss, the fund had $33 million in assets. It now has about $22 million.
Bids are due by late August, and CHA executives hope to have a new administrator in place by mid- to late fall, Ms. Johnson said.
"The notion is .... we do not want to diffuse responsibilities or have multiple (administrators) dealing with fund management," she said.
Still, the pension fund will have a consultant to monitor the plan administrator's progress, Ms. Johnson said.
"Previously (the in-house CHA administrator) had almost universal, unchecked authority," Ms. Johnson said. "Obviously, what we want now is to set up internal controls, as well as setting up outside monitoring controls."
A board of trustees will be set up after a plan administrator is selected.
The CHA's search for a new plan administrator is similar to the Teamsters, Central States, Southeast & Southwest Areas pension fund's 1984 move when it hired Morgan Stanley to act as its manager. In this situation, Morgan Stanley has decided to act as manager for half of the fund, and is the fiduciary for the entire fund. As would the CHA's plan administrator, Morgan Stanley decides the investment strategy for the fund and allocates assets. But unlike the CHA's planned post, Morgan Stanley hires and fires all money managers (Pensions & Investments, April 2, 1984).
Last summer's pension losses were part of what CHA officials called a conservative estimate of more than $26 million because of financial abuses at the housing authority, which resulted in the agency's being put under federal control and has launched systemwide reforms.
In addition, to protect against vendor fraud, the CHA is putting in oversight controls and will fire vendors that do not comply with the agency's requirements.
In June 1994, the CHA's Board of Commissioners called for an investigation into the alleged fraud and questionable operations of the CHA's retirement plan and pre-tax savings plan. Anton Valukas, a partner with Jenner & Block, Chicago, and former U.S. Attorney, heads the investigation.
Separately, Jenner & Block also investigated alleged wrongdoings by some outside vendors working with the CHA.
Based on the findings from both investigations, the CHA's oversight committee and Jenner & Block said the administration and investment of the pension fund should be turned over to an experienced outside firm. It also recommended the CHA should set up new control procedures within the CHA accounting department and other CHA departments that deal with vendors.
The CHA's problems surfaced in June 1994, when the Securities and Exchange Commission filed suits against the CHA's former director of risk management and pension benefits, John D. Lauer, along with Joseph Polichemi and Lyle Neal, who were allegedly involved in filching the pension fund of millions. Mr. Polichemi, chairman of Copol Investments Ltd., was arrested in August 1994 in connection with the SEC suit.
Mr. Neal, chairman and chief executive officer of Konex Holding Corp., allegedly was the one who explained the lending scheme to Mr. Lauer, and told Mr. Lauer "your funds .... are 100% protected at all times" and "are never removed from your direct control" (P&I, June 27, 1994).
The trial of Mr. Polichemi and Mr. Neal is expected to begin in September.