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Wall Street Links to Pennsylvania Pension Fund Probed by SEC

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A $66 billion Pennsylvania state pension fund under scrutiny for errors in calculating investment returns has been asked by securities regulators to turn over records related to possible gifts exchanges with dozens of Wall Street firms, according to a subpoena reviewed by Bloomberg.

The U.S. Securities and Exchange Commission issued the subpoena Sept. 24 to the Pennsylvania Public School Employees’ Retirement System, demanding information about the fund’s dealings with firms including Blackstone Inc., The Carlyle Group Inc., Morgan Stanley, Apollo Global Management Inc. and consultant Hamilton Lane Advisors. 

SEC Enforcement Division Senior Counsel Heidi Mitza asked that the pension fund supply “all Documents and Communications Concerning any compensation, remuneration, money, gifts, gratuities, trips or anything of any value” exchanged between representatives of investment managers, advisers, and consultants and any representatives of PSERS or the state, according to the subpoena. 

The subpoena, which isn’t public, says the SEC is “trying to determine whether there have been any violations of the federal securities laws” and does not mean that PSERS or anyone else has violated the laws. There is no indication that any of the firms listed have been involved in wrongdoing.
PSERS, Mitza and an SEC spokesperson didn’t immediately respond to requests for comment, and neither did Blackstone, Carlyle, Morgan Stanley or Apollo. Hamilton Lane declined comment.

The SEC has previously filed lawsuits against investment advisers for violating their fiduciary duties and anti-fraud provisions of federal securities law related to providing undisclosed items of value to pension clients. The SEC attachment to its PSERS subpoena lists investment advisers by asset class and also requests information about its custodian bank, securities lending agent and other financial services vendors.
The subpoena indicates the SEC is looking into the pension fund’s decision “to engage or not engage any Investment Manager, Adviser and/or Consultant” as well as communications concerning compensation that outside firms may have paid and travel expenses reimbursed for any such engagement.

The issuance of the subpoena was previously reported by the Philadelphia Inquirer, which didn’t provide details about what was being requested. 

“This is the first time I’m aware of the SEC requesting information from a public pension about its investment management process,” said Edward Siedle, a former SEC attorney who has investigated wrongdoing at pension plans. “But if a state pension fund is a client of multiple registered investment advisers, the SEC has jurisdiction over whether they’re abusing their client.”
The information request is the latest legal trouble for the Pennsylvania pension fund, which serves about a half-million active and retired school employees. 

Earlier this year, PSERS acknowledged it had miscalculated its nine-year average rate of return reported in late 2020 and then became the subject of a federal grand jury probe. The pension fund said in April it is cooperating with the U.S. Attorney’s office in the Eastern District of Pennsylvania. 

The PSERS board has hired outside counsel to respond to information requests and conduct an investigation into the performance miscalculation. The error increased the system’s reported investment return by 0.04 percentage point. But the return was later revised downward, putting it below a threshold that forced the pension plan to go to many of its members for additional contributions.

The SEC also is seeking documents and communications related to the calculation error. According to the subpoena, the regulator wants information about any errors or recalculations during that time and the use of unaudited financial information in tallying the return.

“On top of the problems the pension already has, it might now become a witness in an investigation of the people who’ve invested its money,” said David Weinstein, a former prosecutor with Jones Walker in Miami.