Pensions Want Look Into Fund's Records

Date: Wednesday, July 13, 2011
Author: Josh Barbanel, Steve Eder and Jean Eaglesham, The Wall Street Journal

Three Louisiana public pension funds say they are assembling a team of experts to examine the books and financial statements of a New York hedge-fund firm they invested with after the firm responded to redemption requests with promissory notes rather than cash.

Separately, the Securities and Exchange Commission has opened a probe into the fund firm, Fletcher Asset Management, according to a person familiar with the matter. It isn't clear what the regulator is looking at.

A spokeswoman for Fletcher didn't immediately respond to a request for comment. An SEC spokeswoman declined to comment.

In a joint statement Tuesday, the executive directors of the Louisiana pension funds said the response they received to their redemption requests "gives rise to questions regarding the liquidity" of the Fletcher fund in which they invested "and the accuracy of the financial statements" issued by two independent auditing firms.

A representative for one audit firm, Grant Thornton LLP, which no longer has the Fletcher account, declined to comment. Representatives for a second, EisnerAmper, on Tuesday didn't respond to requests for comment.

The three pension systems separately invested a total of $100 million with Fletcher in 2008. They were offered a minimum return of 12% a year. In March, two funds put in redemption requests for a total of about $32 million.

The statement from the pension-fund executives said the investments have accrued the expected return as verified by the auditors. But the firm's decision to pay the redemption in notes in lieu of immediate cash prompted them to take a deeper look at Fletcher's books, the statement said.

Previously, Fletcher in a statement told The Wall Street Journal it wasn't required to distribute redemptions in cash and that it made the payments in accordance with its agreement with the pension funds.

In their statement Tuesday, executives from the three pension funds said Fletcher Asset Management has fully cooperated during the "preliminary assessments conducted by the retirement systems."

A Wall Street Journal article last week highlighted a number of unusual practices at the firm, including the 12% offered to the pension funds. In the arrangement, the return is backed by the holdings of other investors. Fletcher hasn't delivered its 2009 audit for the fund in which the Louisiana pension funds are invested.

Alphonse Fletcher Jr., a former Wall Street trader who founded the asset-management firm in 1991, said in interviews earlier this year that his firm fully and clearly discloses its practices and has acted in accordance with its legal obligations to the pension funds.

Fletcher recently told investors that its 2009 audit has been delayed because the firm needs to "finalize the valuation of one of the fund's investments," according to pension-fund records. On Monday, Fletcher said in a statement the audit is expected by the end of July.

The pension-fund executives said in their statement that Fletcher initially indicated the redemption requests two of the funds made would be "accommodated" at the end of a 60-day notice period.

"Just prior to the expiration" of that notice period, the executives wrote, Fletcher informed the pension boards "that they would receive the requested distribution, but the cash distribution would first require an orderly liquidation of assets held by" the fund. The note gives Fletcher as long as two years to accomplish the liquidation, according to the pension funds' statement, which said the note is payable at 5% interest a year.

Mr. Fletcher, 45 years old, made a splash on Wall Street in the 1990s when he opened his own firm, which reported 300%-a-year returns. Questions about his finances have arisen in a suit he filed earlier this year in state court in New York against the board of the famed Dakota co-operative apartment complex alongside New York's Central Park, where he owns several apartments. Mr. Fletcher accused the co-op board of unfairly rejecting his request to buy an additional apartment and alleged racial discrimination. The case is pending.

Tuesday's statement came as Louisiana state officials and lawmakers called for a possible revamp of public-pension investment rules and a review of the Fletcher investment.

In an interview after the Journal's article last week, Louisiana Legislative Auditor Daryl Purpera said he would meet with key lawmakers to discuss legislation for new, more-strict investment guidelines for public pension funds across the state.

State officials and lawmakers said one proposal might be to consolidate investment decisions for large and smaller public pension funds.

Another option, they said, would be to set uniform investment guidelines for pension funds in the state.

At present, they say, pension boards in Louisiana typically set investment guidelines and review investments independently, including the three boards with Fletcher investments—Firefighters' Retirement System of Louisiana, Municipal Employees' Retirement System of Louisiana, and the New Orleans Firefighters' Pension and Relief Fund.

John Broussard, who oversees investments for the Louisiana state treasurer, said in an interview Friday that he has advised the pension funds "to hire appropriate counsel and investigate further." He said he is particularly concerned about the delayed audit.

In March 2010, Fletcher replaced Grant Thornton, its former auditor, and Citco Fund Services, which had retired as its third-party administrator, according to investor communications.

Fletcher hired EisnerAmper, which has offices in New York among other sites, as its auditor and SS&C Technologies Inc., of Windsor, Conn., as its administrator.

Citco and SS&C declined to comment for this story.

Write to Josh Barbanel at josh.barbanel@wsj.com and Steve Eder at steve.eder@wsj.com