Administration April 10, 2009

Madoff Scandal Generates New Questions about Investment Consultants

April 10, 2009 (PLANSPONSOR.com) - One of the many offshoots of the fallout over the Bernard Madoff Ponzi scheme scandal is a renewed focus on the role of investment consultants who work with pension plans and institutional investors.
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While questions have been raised for years about potential conflicts of interest from consultants who may stand to gain financially by steering clients into a particular hedge fund or other investment, the issue has recently gotten renewed interest with situations like that now faced by the Town of Fairfield, Connecticut, the New York Times reports (see  CT Town Pension Claims $42M Madoff Fund Loss ).

Fairfield is fighting in court with Cambridge, Massachusetts-based NEPC, which served as consultant to the town’s $300-million pension plan for a $100,000 annual fee (see  Conn. Town Sues over Madoff Losses ). The plan suffered a $19-million Madoff-related loss and the two sides are now trading charges and countercharges about who is to blame.

Town officials contend they were never warned about the Madoff investment; NEPC insists it properly informed the client and even recommended reducing Fairfield’s Madoff-related holdings before word came out about the scheme Madoff stands charged with masterminding. Sean Findlen, a spokesman for NEPC, told the Times that Fairfield’s investment in a Madoff feeder fund predated the hiring of NEPC and that the firm had not recommended Madoff or any of his feeder funds.

For its part, the U.S. Department of Labor (DoL) continues an examination of the consulting industry started in 2007 (see  Pension Consulting Industry Probe Continues ). “What we are looking at are pension fund consultants who are fiduciaries, but who use their fiduciary position for their own benefit,” Virginia C. Smith, director of enforcement at the Labor Department, told the newspaper. “We were a step ahead in looking at these issues before Madoff.”

Another case related to the concerns expressed about the consulting industry involves Wilshire Associates, which advised the Iowa state pension fund, as well as the University of Pittsburgh and Carnegie Mellon University, to pour millions into the Westridge Capital hedge fund.

Westridge, the authorities now contend, was a fraud. Iowa hired a law firm to try to recover some of the $339 million it lost on Westridge, and has recovered $35 million already (see  Iowa Fund Only Recovers $35M of $500M Westridge Investment).

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