Employees Sue Oregon Pension for Risky Investments

April 27, 2012 (PLANSPONSOR.com) - Two Oregon state employees sued one of the outside money managers most favored by Oregon's state pension fund for fraud.

The suit also accuses trustees of Oregon’s $58 billion pension fund of ignoring the deception and committing $1 billion in investments between 2008 and 2010 to risky real estate bets by Lone Star Funds, a private equity firm that purchases distressed companies and non-performing bank loans at deep discounts, according to The Oregonian.  

Michael Mueller, the state’s acting chief investment officer Lone Star’s are arguably the premier set of funds the state has invested in over the years. “Getting 1.5 times your money back is something we would take any time,” he said.  

The lawsuit centers on a January 30, 2008, meeting where Lone Star pitched the Oregon Investment Council on two new funds it was raising to buy distressed real estate and bank loans. Weeks before the meeting, in a Korean fraud trial, prosecutors accused Lone Star of driving down the price of Korea Exchange Bank’s credit card unit before Lone Star bought the bank in 2003. Oregon was an investor in that transaction through its investments in previous Lone Star funds.

The Oregonian reports that at the meeting in Oregon, Grayken was asked about the allegations by a member of the Oregon Investment Council, but dismissed them as political issues that were largely resolved. The Council did not press the issue, and at the conclusion of the meeting, voted to invest $600 million in the two funds.

Just two days later, the head of Lone Star’s South Korean operations, Paul Yoo, was convicted of stock manipulation and sentenced to five years in prison.

The lawsuit accuses Lone Star of failing to fully inform the Investment Council of the truth behind the Korean charges, including the fact that Yoo, who was allegedly listed in Lone Star's offering materials for the funds, was in prison. It accuses the Oregon Investment Council's real estate consultant, Nori Lietz, of abetting the fraud by failing to bring Lone Star's Korean issues to light during due diligence. The lawsuit notes the consultant subsequently flew to Korea and investigated Lone Star's activities, including a public apology and offer in 2006 to pay $106 million to an unspecified Korean charity. The lawsuit notes that such an offer would violate the Foreign Corrupt Practices Act.   

The suit was filed on behalf of the Oregon Public Employees Retirement Funds. In addition to Lone Star, it names as defendants Public Employees Retirement System and Treasury staff; Treasurer Ted Wheeler and Attorney General John Kroger; the two citizens boards that oversee the pension system and its investments; and a consultant that helps the Treasury vet and monitor real estate investments.   

The State Treasury and the Oregon Investment Council, a citizen's panel appointed by the governor, are accused of ignoring the fraud, not only in 2008, but when Lone Star returned in 2010 to seek investments in two new funds. The Council committed another $400 million to Lone Star in 2010.

Treasury Spokesman James Sinks told the newspaper the agency would need to analyze the lawsuit before commenting. A Lone Star spokesman said the suit was "entirely without merit."

The lawsuit seeks cancellation of the Lone Star contracts, the return of at least $1 billion to the pension fund, damages for breach of contract by the Investment Council's consultant and attorneys fees.