KY Audit Details Questionable Placement Agent Activities

June 29, 2011 ( – An auditor’s report found nearly $11.6 million in fees paid or committed to placement agents from the Kentucky Retirement System from 2007 to 2010.

According to the Lexington Herald-Leader, State Auditor Crit Luallen said one placement agent in particular, Glen Sergeon of New York, enjoyed close access to KRS through his relationship with Adam Tosh, then KRS’ chief investment officer. Tosh resigned in 2010, shortly after internal auditors at KRS questioned him about nearly $6 million in fees paid to Sergeon in KRS deals (see KY Pension Officials Release Placement Agent Audit).  

The report said no other placement agent won more deals from KRS than Sergeon. Luallen said her office did not have access to Tosh’s and Sergeon’s personal financial records, so she could not determine whether money privately changed hands between them, but she is forwarding her report to the U.S. Securities and Exchange Commission for further review.   

Tosh, now a managing director at Rogerscasey investment firm in Darien, Connecticut, did not return a call from the Herald-Leader seeking comment, and Sergeon could not be reached for comment. Both men refused to speak to state auditors, Luallen said.  

The report details that Tosh arranged for Sergeon to attend a 2009 KRS investment committee meeting that led to a $200 million commitment to invest in the hedge fund Arrowhawk, a deal for which Sergeon would be paid placement agent fees. Tosh did not introduce Sergeon to committee members or explain what Sergeon’s interest was, auditors wrote.  

E-mail messages show that Sergeon organized trips and business meetings for Tosh in New York, Dallas and San Francisco, which led to investment deals for which Sergeon was paid fees. KRS officials were not informed of Sergeon’s role in these trips.   

In some instances, Tosh did not submit all of the expense records for his out-of-state travel — for example, restaurant meals — raising the possibility that outside parties with an interest in KRS business might have treated him, the report noted. “This may be in direct conflict with the best interests of KRS, as placement agents may be more inclined to bring KRS those (investment) managers that are willing to pay them the most advantageous fee,” auditors wrote. 

Under KRS disclosure rules, Tosh was supposed to tell his superiors about Sergeon’s role in investment proposals, but he repeatedly failed to do so. Several times Tosh recommended investments linked to placement agents while bypassing KRS’s outside investment consultants, who were paid nearly $300,000 a year to weigh in on such proposals.  

In the report, auditors made 92 recommendations to strengthen controls and oversight. According to the news report, in short, Luallen said, the nine-member KRS board of trustees — some of whom are elected by government employees, others of whom are appointed by the governor — must ask more questions about the agency’s investments and administrative costs. 

Luallen will present her audit to the legislature’s interim joint committee on state government. She said lawmakers might want to consider legislative changes, such as requiring placement agents to register as lobbyists with the Executive Branch Ethics Commission.