Crain News Service
SPRINGFIELD, Ill. -- A who's who of local investment firms have been subpoenaed as part of a growing federal grand jury probe into operations of the $15 billion Illinois Teachers' Retirement System.
Industry and legal sources said as many as 70 firms that have worked as financial advisers to the state's largest public pension fund have been asked to provide documents to a grand jury detailing how they were selected and managed.
The subpoenas follow a series of controversies that has wracked the Teachers Retirement System, involving huge trading losses, the departure of key executives and charges of favoritism and other misconduct.
Frances Hulin, the U.S. attorney for the central district of Illinois, declined comment on the probe. A State Police spokesman said only, "we are working with the FBI and the U.S. attorney's office on this investigation."
But officials at four Chicago-based investment firms confirmed they have received subpoenas in recent weeks. Officials at other firms declined comment. At least one California-based company, Pacific Investment Management Co., also has been asked to provide material, according to the Springfield State Journal-Register. George Wood, senior vice president for PIMCO, declined comment as a matter of firm policy.
The subpoenas do not mean any of the investment management firms were engaged in wrongdoing. In most -- and perhaps all -- cases, the subpoenas appear to be aimed at identifying instances where the money managers might have been the subject of coercive behavior by retirement system employees.
The teachers system uses many high-profile Chicago-based money managers, including UBS Brinson, Capital Associates Realty Advisors and Lincoln Capital Management Co. Officials of those firms declined comment, but other firms confirmed they have been subpoenaed.
Heitman Capital Management was asked for information relative to "how the state conducted business, how were decisions made," and so forth, according to Chairman Jerome Claeys.
Frontenac Co. was asked to supply documents "regarding present and former executives of TRS," said Rodney L. Goldstein, managing partner.
Joseph Spagnolo, who is about to leave his posts as state school superintendent and chairman of the retirement system board, said he understands "50 to 70" firms have been subpoenaed.
The retirement system, which covers 166,000 current and retired teachers, has long had a reputation for political arrogance in Springfield. For instance, state Treasurer Judy Baar Topinka still is steaming over the refusal of TRS officials to answer her questions on a financial matter a year ago. "If you can't get an answer any other way, you go to a grand jury," she said.
But the system's troubles took a legal turn last year, when state Auditor General William Holland reported an investment manager hired under unusual circumstances, Thomas Zimmerman, had lost $299 million of TRS funds in 22 months in currency and other derivatives trades. TRS Executive Director Robert Daniels resigned soon after the audit, citing the episode as a reason for his departure.
Then, a former TRS real estate analyst, Robert Schau, charged in a letter to state and federal law enforcement agencies that TRS investment decisions appeared to be based on other than financial criteria, notably personal friendships and junkets.
In an interview last month, Mr. Schau, who now works for the Kansas Public Employees Retirement System, said that while "I really don't have concrete evidence" of impropriety, "my experience is (that) people were getting hired for reasons outside of the standard."
Mr. Daniels has moved to New Mexico and could not be located for comment.
Mr. Schau's letter to authorities refers to ski trips and other junkets offered by some firms to TRS officials. "Perks were a sort of necessary part of the formula to get business," Mr. Schau said last week.
Mr. Zimmerman had worked as TRS' chief investment officer before resigning in 1995 and immediately being hired back in his capacity as president and chief executive of a new firm, Chicago-based Zimmerman Investment Management Inc. The hiring required the TRS board to waive its usual one-year revolving-door policy, but Mr. Zimmerman last week said his strong performance justified the action.
Mr. Zimmerman acknowledged his new firm suffered heavy losses trading the $1.5 billion in securities it managed. However, he said that happened because his firm specifically was hired to hedge investments held elsewhere in the TRS portfolio. Since those investments rose because of strong stock and bond markets, the value of the hedge dropped, he added; he pegged that combined loss at a more modest $44 million.
In the five years ended June 30, 1997, TRS' overall portfolio, which also includes real estate and venture capital investments, had a net annual return of 12.5%, and the fund remains sound. However, that's below the 13.5% mean for similar public-sector funds followed by the Trust Universe Comparison Service.
The TRS board is "likely" to name a new executive director at its meeting Aug. 13 and 14, according to Mr. Spagnolo.
TRS' legal problems come as state teachers begin to enjoy a new, taxpayer-financed retirement plan that allows some teachers to retire sooner. Clayton Marquardt, executive director of the Illinois Education Association, said that while the teachers' union did seek the plan, it also has been demanding -- and getting -- changes at TRS. The new executive director "is going to have to take a careful look" at all TRS operations, Mr. Marquardt said.
Acting TRS Executive Director John Day said the system now insists that all new investment managers have performed in the top quartile of their peers. TRS also has hired Independent Fiduciary Services Inc. and accounting firm Clifton Gunderson LLC to review investment management policies.
