Is It a Conflict for a Pension Fund's Investment Officer to Propose Outsourcing to His Firm?
After all the problems San Diego pension boards have had with conflicts
of interest (see <a href="http://www.cityethics.org/content/local-government-employees-local-gove…; target="”_blank”">my
blog pos</a>t from November 2009), one would think they would be
extra-sensitive to further conflicts. But, alas, not in this case.<br>
<br>
Last September, the San Diego County Employees Retirement Association
(SDCERA) chose to replace its unsuccessful investment officer not with
another investment officer, but with an unbid contract to Lee Partridge, for substantially
more money (see <a href="http://www.sdcera.org/PDF/SDCERA-signs-CIO.pdf" target="”_blank”">SDCERA's press
release</a>). The catch was that the outsider could not supervise
SDCERA's investment employees.<br>
<br>
To resolve that problem, according to <a href="http://www.voiceofsandiego.org/government/article_96b61e10-323f-11df-be…; target="”_blank”">a
recent San Diego <i>Union-Tribune</i> article</a>, Partridge recommended that
SDCERA outsource its entire investment program to his company, Integrity Capital, once again on a
no-bid basis, with incentives for performance better than market, and
with all the downside risk to be taken by SDCERA.<br>
<br>
A county supervisor on the pension board suggested there might be a
conflict of interest. According to <a href="http://www.voiceofsandiego.org/environment/muck/article_65bf61a4-33bb-1…; target="”_blank”">another
<i>Union-Tribune</i> article</a>, the board's attorney "said he'd analyzed
relevant
laws and acknowledged that a perceived conflict may exist, but that
none had yet occurred. He said no legal issues would prohibit the
board from picking (and paying) Partridge to lead the outsourced
investment team." The attorney added, "I think now's not the time to
get into a detailed discussion of
the legal issues."<br>
<br>
It seems that all the elements of a conflict already exist. An
individual is acting as a pension board investment officer and yet is
pushing a contract by which the same board would outsource its entire
investment program to him. What element of a conflict does not yet
exist?<br>
<br>
As it turns out, another pension board member successfully questioned
the no-bid aspect of the outsourcing, and a compromise was
reached: a board subcommittee would select other investment firms
to make bids. Not an open competitive bid, but not a no-bid situation.<br>
<br>
But can board members who strongly favor someone they already have a
close relationship with make a decision on whom to allow to bid and
whom to choose that will truly be in the public interest and be seen to
be in the public interest? SCERA's CEO "said he believed Partridge was
still the top
option but allowed the possibility that another firm could be
chosen. 'We'll get them in here and make a proposal and compare them to
Lee's,' White said. 'At a minimum, it'll validate that Integrity is
the best. And if not, we'll select someone else.'"<br>
<br>
Ordinarily, outsourcing is intended to save money. But in this case, it
appears that, as with the hiring of Partridge at a salary far higher
than the stated county salary, a principal goal seems to be to pay
people more. According to yet <a href="http://sandiegonewsroom.com/news/index.php?option=com_content&view=arti…; target="”_blank”">another
<i>Union-Tribune</i> article</a>, a trustee for the city's retirement system
said, “I have no idea why they did what they did. If I was on that
board I would have argued against it and voted against it. I don’t
think it’s going to save any money.”<br>
<br>
And yet the vote was 7-1 in favor of the plan. <br>
<br>
Since everyone considers Integrity Capital to be the best answer to the
county's pension investment needs, I looked it up to see who its other
clients are. I couldn't find it, nor any links to it. There's <a href="http://www.integritycapital.com/" target="”_blank”">Integrity Capital in Palo Alto</a>,
a wealth management firm. There's <a href="http://www.integrity-capital.com/" target="”_blank”">Integrity Capital LLC in
Scottsdale, AZ</a>, a commercial mortgage firm. There's even <a href="http://www.integritycapitalinc.com/" target="”_blank”">Integrity Capital, Inc.</a>
in San Diego, a real estate lender. There's <a href="http://www.icchomeloans.com/" target="”_blank”">Integrity Capital Corp. in
Cranford, NJ</a>, which does home loans, and there's <a href="http://www.integrityp.com/" target="”_blank”">Integrity Capital Partners in
Bethesda, MD</a>, a life insurance company.<br>
<br>
Clearly, Partridge's Integrity Capital is not trying to create much of
a public reputation.<br>
<br>
Partridge might very well be the best man for the job. But his
involvement in the plan to move SDCERA's investment staff to his firm
has tainted the entire process. And the attitude of SDCERA's CEO and of
its attorney have further made the plan look improper. No one could
believe that SDCERA could make an unbiased decision in the public
interest about who benefits from a plan put together by the leading
candidate for the contract, even if a few selected others are allowed
to make proposals consistent with Partridge's.<br>
<br>
Not only does a conflict exist, but it is a difficult conflict to fix
unless, of course, Partridge took himself out of the running. Barring
that, I think that either the plan should be shelved, or an individual
or board completely independent of SDCERA should decide who wins the
contract, and it should be open to anyone who wants to bid.<br>
<br>
A parting note: we all can profit from the name of Partridge's firm: integrity is capital. Investing in it pays off with interest. Conflicts undermine value and should be avoided.<br>
<br>
Robert Wechsler<br>
Director of Research-Retired, City Ethics<br>
<br>
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