MADISON, Wis. - The $67 billion State of Wisconsin Investment Board needs to take steps to avoid conflicts of interests - or the appearance of such - in making its investments, according to a report by the Wisconsin Joint Legislative Audit Committee.
At issue was the investment board's investment in a South Korean company, whose stock also was held by two board members, and a controversial purchase of bonds from Heartland Advisors Inc.
Although the audit states it is unclear whether violations of the State Ethics Code took place, it does take the board to task for the appearance of violations. "The vote (for a controversial stock), at a minimum, presents an appearance of a conflict that the trustees should have taken steps to avoid," reads the audit.
The audit committee examined SWIB's investments with two companies to which three board of trustee members had ties. The audit raised the question of unethical conduct, said state Rep. Joe Leibham, a member of the audit committee.
The committee, which conducts audits of the investment board every other year, has asked the state's ethics committee to investigate Jon Petersen and Albert Nicholas, two members of the board. Both were shareholders of Korean Online Ltd., a South Korean firm the board has pumped $110 million into since May 1999. Messrs. Petersen and Nicholas did not recuse themselves from voting on KOL investments, said Vicki Hearing, a SWIB spokeswoman.
The KOL investment has caused headaches for the investment board. The poorly performing South Korean economy and accusations of fraudulent activity by another KOL shareholder have been factors in problematic performance. The current value of the investment in KOL is $15.9 million, for a loss of 86%, said Ms. Hearing.
All members of the SWIB board of trustees are required to report all stock holdings to the state's ethics committee, said Ms. Hearing. That information can be seen by the Legislative Audit Committee. However, board members are not required to report their holdings to the board of trustees. Messrs. Petersen and Nicholas have said their failure to recuse themselves from voting for the KOL investment was an oversight, according to Ms. Hearing. Both have appeared before the ethics committee.
SWIB and Legislative Audit Committee officials have asked the ethics committee to investigate further. No disciplinary action is being taken at this time. "We're letting the ethics board look at that because that is their job," said Ms. Hearing.
Mr. Nicholas denies any attempt to violate SWIB policies or the law. "I thought it was insignificant," Mr. Nicholas said of his investment in KOL. He could not provide the amount of his investment. Mr. Nicholas added he sold his shares of KOL five months after SWIB bought shares. "It turned out to be higher risk than I thought," he said.
Off the board
Mr. Nicholas said he believes he does not need to be involved in an ethics board investigation because he no longer serves on the board. "It wasn't a very good experience," he said of his time on the board.
He resigned in January, but would not say why. However, in an interview last February with the Milwaukee Journal Sentinel, Mr. Nicholas said he quit because he was upset about the transaction involving Heartland Advisors Inc. but also so he could devote more time to his work and family.
He continues as chairman and chief executive officer of his Milwaukee-based investment management firm, Nicholas Co. Inc., which manages $4 billion, primarily in equity mutual funds. (Of the $5.5 billion Nicholas reported as of last Jan. 1 for Pensions & Investments' directory of money managers, only $1.8 billion was institutional with about 45% of that amount coming from U.S. institutional tax-exempt clients.)
Mr. Petersen, who owns Inland Investment Co., an investment management firm in Madison, would not comment on the situation.
Jon Hammes, chairman of the investment board, also was named in the audit in relation to the Heartland deal. On Sept. 29, 2000, SWIB purchased $8.3 million worth of distressed bonds from Milwaukee-based Heartland. Mr. Hammes serves as an independent director on Heartland's board. Ms. Hearing pointed out Mr. Hammes recused himself from voting on the investment and SWIB has the option of selling the bonds next Sept. 29 for a guaranteed return of 20%.
Although the audit found additional oversight of the board was necessary to prevent conflicts of interests, it did not make accusations that Mr. Hammes influenced the vote on the Heartland deal.
Mr. Hammes did not respond to calls for comment for this story.