Tuesday, March 13, 2012

Independent counsel blisters Crit Luallen

A national leader in the field of forensic investigations in the money management industry is criticizing former Kentucky state Auditor Crit Luallen for botching a pre-election audit of the state pension system last summer in an ongoing scandal that appears to involve tens if not hundreds of millions of dollars in losses on her watch.

Edward Siedle of Benchmark Financial Services in West Palm Beach, Florida expressed shock that Luallen could miss obvious "red flag" signs of corruption at Kentucky Retirement Systems (KRS).

"The entire investment management contracting process at KRS appears suspect at this time," Siedle said.

He said her audit was "remarkable in its failure to adequately address the most obviously troubling issues surrounding use of placement agents at KRS."

Placement agents are salespeople who connect investment firms with big money clients like the KRS in return for unjustifiably large fees paid by the firms. Large institutional investors like KRS should have no problem at all in negotiating away entirely these placement agent fees which, Siedle said, are so improperly accounted for that we still don't know how much we have paid or are paying in excessive fees.

Siedle cited some of the circumstances behind the placement agent "pay-for-play" activities, which read like a modern day, high tech Bluegrass Conspiracy tale with the penny loafers and cocaine traded in for wingtips and the cold-sweat desperation of a big government apparatchik realizing the gravy train is about to hit the wall. The common denominator, of course, is the politicians too dumb and too crooked to speak up before it all comes crashing down.

The good news, as Siedle sees it, is that at least some of the improperly spent funds may be recoverable. First step, though, is to end the cover-up and to start getting everyone talking about where the money is.

In what amounts to an interesting side note but should be instructive nonetheless given any future political aspirations Luallen may have was her published assessment of who ultimately pays placement fees. Luallen said in her audit "it was also determined that the payment of placement agent fees by investment managers did not correlate to an increase in the management fees paid by KRS or reduce the funds available to pay benefits to retirees."

Simply put, if Luallen had the last word on this, the millions in squandered funds wouldn't be recoverable in court because the most powerful woman in Frankfort for the last two decades doesn't think we were overcharged at all as she apparently doesn't understand how service providers pass increased costs along to consumers.

That's the same kind of reasoning that has allowed the Obama Administration to say they are going to give away free health insurance by just making the insurance companies pay for it.