Unusual investment arrangement puts taxpayers on the hook for over $100 million in potential losses

NEW ORLEANS, La. – Three Louisiana public pension funds sought to withdraw their $143 million investment from Fletcher Asset Management earlier this week, but were presented with promissory notes, or IOUs, in lieu of cash.

The three public pension funds – the Firefighters’ Retirement System of Louisiana, Municipal Employees’ Retirement System of Louisiana, and the New Orleans Firefighters’ Pension and Relief Fund – separately invested a total of $100 million in Fletcher Asset Management in 2008, in an unusual arrangement that offered a minimum of a 12 percent guaranteed return on investment backed by the holdings of other investors.

According to the deal, if the fund earned less than 12 percent, other investors, not the three pension systems, would absorb the losses, while any returns over 18 percent would go to the other investors.

The Wall Street Journal had hedge-fund lawyers analyze legal documents related to the agreement, and claim to have never seen such an arrangement.

Josh Barro, tax and fiscal policy analyst for the Manhattan Institute, said that if the money has been lost by investors, pensioners would not lose their retirement benefits, but, “taxpayers need to be especially concerned about the management of pension fund assets” and that policymakers, “should not insist on unrealistic investment return targets.”

In Louisiana, losses in public pension fund investments are borne entirely by taxpayers.

Alphonse Fletcher Jr. - Founder of Fletcher Asset Management

In a joint statement released last week, the executive directors of the Louisiana pension funds said the response to their attempt to withdraw funds “gives rise to questions regarding the liquidity” of the Fletcher fund, “and the accuracy of the financial statements” issued by two independent auditing firms.

According to Barro, accounting for a loss due to fraud is not different from accounting for other kinds of losses, therefore if the pension funds determine that they are at significant risk of being unable to collect on their IOUs, “they will have to recognize [the investment as] a loss,” and taxpayers will make up the difference.

In 2009, Fletcher reported to the Securities and Exchange Commission it had a year-end total of $558 million in assets under management, but creative accounting allowed Fletcher to arrive at this figure by counting some assets more than once.

A more orthodox method of measuring assets shows total assets equal to $198 million, which implies that the Louisiana pension systems’ investment makes up over half of Fletcher’s assets.

Rep. Kevin Pearson (R – Slidell) recently stated that he is interested in the role Joe Meals, principal of Consulting Services Group LLC, and his colleagues played in the Fletcher investment.

Rep. Pearson’s concerns are related to the unusual nature of some investments recommended by CSG and Mr. Meals, specifically the Fletcher investment that Mr. Meals said offered guaranteed returns.

Rick Nummi, CSG’s general counsel, recently wrote that, “Nothing in CSG’s continued monitoring or due diligence revealed any potential concerns at Fletcher until” a delay of a 2009 Fletcher audit “prompted further scrutiny.”

However, this would not be the first time CSG and Mr. Meals would face an inquest from regulators:

  • In October 2007, the SEC issued cease-and-desist proceedings and imposed sanctions against CSG and Mr. Meals related to the firm’s ethics policies, according to an administrative proceeding.
  • In 2009, CSG and Mr. Meals reached a settlement with the U.S. Department of Labor after Mr. Meals allegedly received, “undisclosed and unauthorized compensation, and failed to timely provide promised commission rebates to certain [Employee Retirement Income Security Act] plans from 2002 to 2006.”
  • Also in 2009, CSG was questioned in a “pay to play” probe by the SEC and New York attorney general into alleged improper payments from investment firms seeking business from New York state’s public pension fund, but was never charged.

Denis Kiely, director of Fletcher Asset Management, claims in a March 2008 email to a pension executive that the 12 percent arrangement is a “preferred return guarantee,” and claims that his use of the term “guarantee” was “colloquial” and not meant with “the legal definition.”

In a separate legal matter, documents provided by Alphonse Fletcher Jr., the founder and manager of the hedge fund, to a New York state court showed his business lost money in two recent years.

Daryl Purpera, the Louisiana Legislative Auditor, said he would meet with key lawmakers to discuss legislation for new investment guidelines for public pension funds across the state.

Currently, Louisiana pension boards set investment guidelines and review investments independently.

Barro agrees, and contends that elected officials are preventing fund managers from reducing investment targets because legislators, “do not want to recognize a greater unfunded liability,” as would be required if the investment target was lowered. Therefore, “fund managers are compelled to chase higher returns through more exotic and riskier investments.”


Robert Ross is a researcher and social media strategist with the Pelican Institute for Public Policy. He can be contacted at rross@pelicanpolicy.org, and you can follow him on twitter.