Senator Joseph Pennacchio, a member of the Senate Labor Committee, issued the following statement after learning the state pension system has reported it lost $115.5 million on an ill-advised investment in now-bankrupt Lehman Brothers Holdings:
“I’m glad the State Investment Council gave an accounting of its losses in Lehman thus far and admitted the investment was a mistake. However, I have not received a reply to my Sept. 15 letter asking the Council and the state Division of Investment to provide a full accounting of how this investment was made.
“News reports indicate that the council is considering litigation because the state may have been given inaccurate information about the prospects of this Wall Street bank. I strongly endorse the pursuit of legal action.
“However, the prospect of litigation should not be used as an excuse for the Council or the Division of Investment to withhold information about the events that led to this investment. Indeed, a full review of the process and disclosure of the findings should support any claims the state might make before the courts.
“I ask the state Treasurer to fulfill his fiduciary responsibility to taxpayers and pensioners and prepare a report that can be ready for review as soon as the Senate comes back into session next month.
“The review should detail whether two Lehman executives and one former Lehman managing director who reportedly serve on the board of the Investment Council divorced themselves from decisions about the Lehman investment. It should also detail whether political pressure was applied as part of state efforts to keep Lehman from moving offices outside the state.
“I urge the Investment Council to provide a prompt and complete reply to my letter of Sept. 15. The appearance of conflict of interest and political meddling in the pension funds simply can not be tolerated. Full and immediate disclosure is the only proper course of action.”
The letter sent to Investment Council Chairman Orin Kramer is below:
Orin Kramer
Chairman New Jersey State Investment Council
50 West State Street
9th Floor
Trenton, New Jersey 08625-0290
Chairman Kramer:
A recent Star-Ledger article reported that the New Jersey Division of Investment invested approximately $178 million in Lehman Brothers Holdings in June.
As you know, just three months later, Lehman is bankrupt. The final tally of losses from the state’s purchase of Lehman common stock is likely to exceed $50 million. Given that the state reportedly also invested $60 million in Lehman preferred stock, it is not too far fetched to assume that state’s losses may amount to more than $100 million.
I am well aware that there are risks involved in investing the billions of dollars of pension funds, and that substantial losses can and do occur with frequency, especially in today’s volatile stock, bond and commodity markets.
However, I am very concerned by reports suggesting that the decision to invest in Lehman stock was not made solely on the fundamentals of sound investment strategy. The Star-Ledger report states that a desire to keep Lehman from closing offices in New Jersey played a role in the decision to place a huge sum in the hands of an investment bank widely reported to be teetering on the edge of insolvency.
I am especially concerned that Lehman collapsed so soon after New Jersey made its investment. I wonder whether Lehman was sufficiently candid when it made its presentation to the state asking for investment money. News reports suggest that Lehman only came to the state after being turned down by many, many other large investors.
Therefore, as a legislator, I feel it is my duty to investigate further whether this was a sound investment move that turned bad or a reckless wager with the hard-earned money that we take from public employees and taxpayers.
In addition, some reporters have asked whether members of the investment council and/or state officials had relationships with Lehman executives that led them to be overly trusting of reports of the bank’s fiscal integrity, rather than looking at the fundamentals with prudent skepticism and then conducting thorough due diligence.
The losses and the questions about the risks of this investment indicate that the state’s investment process needs a legislative review. Frankly, I am concerned that a $29 billion (and growing) deficit in the pension funds has created a sense of desperation that is prompting overly risky investments in the quest for higher returns.
With that in mind, I ask the council to provide answers to the following questions along with supporting documents and information about the Lehman investment:
Please provide a written and complete narrative of how the decision to invest in Lehman was made. Include the names of everyone who had a role. Also include a critique of the process used in making this decision and how it stands up in comparison to the processes used in making other investments of pension money.
Please provide copies of all information and presentations Lehman gave to the council and to the Division of Investment as it made the request for New Jersey’s investment in its stock. Also provide the names of the Lehman personnel who played a role in providing information or persuading the state to make the investment.
Provide copies of all analyst and research reports, analytical data and in-house research and memorandum used in or gathered as part of the evaluation of the potential investment.
Please provide the names of anyone who played a role in evaluating data or communicating with Lehman about this investment on behalf of the state. Please detail any relationships, if any, that members of the Investment Council or anyone working on behalf of the state have with Lehman executives.
If anyone working on behalf of the state had or has relationships with Lehman, please detail if there were times when these officials recused themselves from the decision-making process. If they did not recuse themselves from such decisions, please explain why they did not.
Finally, include a report on whether members of the Division of Investment and the Investment Council believe there are grounds for either civil or criminal investigation in regard to the representations that Lehman made to the state about its financial soundness and ability to continue as a going concern.
I appreciate your attention to these matters, and await a prompt reply.
Sincerely,
Senator Joseph Pennacchio
District 26
Cc: William Clark, chairman of the Division of Investment
Link to Post:
Similar Posts:
- Pennacchio: Use Hearing to Get Answers on Lehman From Corzine Pension Officials
November 20, 2008 - Pennacchio Calls for Special Hearings on Pension Investments
November 3, 2008 - Pennacchio Asks When New Jersey Will Join Other Pension Funds Suing Lehman
November 17, 2008 - Senator Pennacchio Challenges Investment Council Members With Lehman Ties to Disclose Roles
October 6, 2008 - Pennacchio Continues to Demand Accountability for Lehman Investment
October 21, 2008
