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3 Louisiana pension funds file suit over hedge fund investment

firefightersjpg-efb09817819bb501By Richard Thompson, | The Times-Picayune

Five years after three Louisiana retirement systems invested $100 million in a hedge fund promising high returns with low risk, a pact that has since soured, pension trustees are now suing the financial services firm that administered the ill-fated deal.

In 2008, trustees of the pension plans — the Firefighters’ Retirement System, the Municipal Employees Retirement System, and the New Orleans Firefighters’ Pension and Relief Fund — invested the money, between 4 percent and 9 percent of their assets, in the flagship fund of the New York-based Fletcher Asset Management.

The hedge fund investment was set up as a multilevel “master-feeder” fund structure, involving companies incorporated in the Bahamas, Bermuda, Delaware and the Cayman Islands. But the deal didn’t deliver as billed, according to the lawsuit, which contends that Fletcher invested in illiquid investments, failed to reinvest the money in new assets, and that “substantially all” of the firefighters’ $100 million went to paying out earlier investors.

From the start, the Fletcher fund promised state pension officials an unusual offer: a guaranteed 12 percent rate of return on their money. If that dipped lower, the difference would be covered by $50 million put up by Citco Fund Services, a Cayman Islands subsidiary of the financial services firm Citco Group Ltd., according to the lawsuit, filed March 1 in the 19th Judicial District Court in Baton Rouge.

A Citco spokesperson did not return a call for comment Tuesday.

Pension trustees sought to cash out their investment in March 2011, but were met with IOUs instead of cash. The deal has been tied up in court since; it’s unclear if the hedge fund’s manager, prominent Wall Street investor Alphonse Fletcher Jr., still has the money.

The lawsuit also contends Fletcher shuffled $80 million from one level of the hedge fund to another, “in an attempt to ‘prop up’ the capital,” overstating its cash flows and value, a point that was not disclosed to the pension trustees.

In addition to Citco, the suit also lists Grant Thornton, a Chicago-based accounting firm, as a defendant. The accounting firm audited the hedge funds in 2007 and 2008, then withdrew the audits and issued restated reports in 2011, according to the lawsuit. Grant Thornton resigned as the hedge fund’s auditor in March 2010.

In January 2011, “Grant Thornton finally admitted that the original audits were not accurate based upon the issuance of the restated audits almost one year after it resigned as auditor,” according to the lawsuit. “The reasons Grant Thornton was so late in explaining the reasons for the restatement one year after its resignation and completion of work is inexplicable and implies, at best, that it was complicit in the cover up of the misrepresentations and omission,” the suit alleges.

A spokesperson for Grant Thornton did not return a call for comment Tuesday.

From April 2008 until March 2010, the suit alleges that Citco officials told pension trustees that their investment was gaining value, with the initial $100 million growing to about $125 million.

“If accurate information had been provided, about the use of the funds for other redemption, or the $80 million debt,” the suit contends that pension trustees “would have immediately … exercised their right of redemption and demanded payment.”

Besides Citco Group Ltd. and its subsidiaries, Fletcher Asset Management and several top executives, and Grant Thornton, the lawsuit also names as defendants Consulting Services Group, a Memphis-based consulting firm, and the hedge fund’s shareholders who were paid back from the firefighters’ initial investment.

The lawsuit lodges 13 counts against the defendants, including violating state securities laws for failing to disclose required financial information, such as how the investment proceeds were used, the $80 million debt obligation, and the true value of the assets.

In 2008, Fletcher sold the public pension boards on its reputation, fund administrators have said, making a convincing case in a presentation touting that it had not seen a losing month in more than a decade, and boasting of having Harvard University as its first institutional investor.

The hedge-fund could also be liquidated “in a matter of weeks,” one of its directors told the Firefighters’ Retirement System during a pitch in March 2008, a claim they say hasn’t held up.

The Wall Street Journal reported last week that the Internal Revenue Service has filed a $1.4 million income-tax lien against Fletcher, dating back to a 2010 tax filing.

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