Zurik: Kennedy blasts MERS 'slush fund'

Zurik: Kennedy blasts MERS 'slush fund'

NEW ORLEANS (WVUE) - The state treasurer didn't mince words as we showed him new findings in our investigation of a state retirement board.

"Somebody's got some explaining to do," says John Kennedy. "Based on what I see now, this just doesn't pass the smell test. I find that incredible."

Our investigation has shown questionable spending by the head of the Municipal Employees Retirement System, or MERS. The director, Bob Rust, makes $215,000 a year. But we found him spending money on trips to the Gulf Coast during holiday weekends.

Rust defends his spending this way. Much of that trip money is being paid out of an educational fund account. Rust raises the money from investment managers and companies, who buy a $1,500 sponsorship to their annual educational conference in Alabama. MERS uses that sponsorship money to pay for alcohol and pricey meals.

"There's no defense of this," Kennedy says.

And here's why Kennedy is once again outraged. In 2008, MERS invested in a New York hedge fund from a company, Fletcher Asset Management. Fletcher promised MERS a 12-percent annual return. MERS invested $40 million.

In March 2011, MERS went to Fletcher, trying to get some of its money back. Fletcher didn't pay up - the fund went belly up and Fletcher could only give the board an IOU.

"They refused to pay us," Kennedy recalls.

Then, in May 2011, Fletcher contributed $1,500 to that educational fund.

"What? Jeez," Kennedy reacts. "At the same time they were refusing to pay? Well, that's terrible."

So again, Fletcher wouldn't pay the retirees their money, but would pay $1,500 toward the educational fund, which partially funded alcohol and pricey meals for board members and Bob Rust.

"So you're telling me, what they're telling us, they're not giving back the money belonging to members, the retirees... They made a contribution to the education fund?" asks Kennedy. "There's another item that's going to go on the list. I mean, this has got to be answered."

Last week we emailed Rust, board chairwoman Claire Sarradet, and the former board chairman, Ronnie Harris. We wanted to know if Fletcher contributed to the educational fund prior to 2011. We asked for those records and asked them to get back to us by close of business Thursday.  Late Monday, four days after our deadline, Rust responded with the information. Fletcher also sponsored the educational conference in 2008, 2009, and 2010.

Kennedy has made his own public records request to MERS, for all records related to that educational fund. He thinks what the board and Rust are doing is wrong.

"I'm not sure that's either legal or ethical," Kennedy says.

Remember: MERS is getting $1,500 sponsorship fees from companies they do business with, and companies seeking their business. Kennedy says he thinks it's a clear violation. As state treasurer, Kennedy heads the State Bond Commission. And as the chair, Kennedy says he could never take money from that commission's vendors.

"Suppose I said, okay, all you investment bankers henceforth, if you want to do business with the treasurer's office, you each have to contribute $5,000 to an 'education fund' that I administer, to take people out to dinner and to go to Disney World," he says. "No! That's a violation – I'm not a criminal lawyer, but it's probably a violation of criminal law, and I know it's a violation of the code of ethics."

Kennedy calls that educational fund basically a slush fund. He says, even if MERS had the best of intentions, the appearance doesn't look good. All you have to do is look at the arrangement with Fletcher Asset Management - a company that lost millions for current and future retirees, but still helped fund Bob Rust's and board members' pricey stays at an Alabama four-and-a-half star resort.

"The appearance of a conflict is sometimes, often times, just as bad as a conflict," Kennedy says, "because when members see this, they wonder to themselves, 'well, are the board members doing the right thing? Is the director doing the right thing? Is he picking the right money manager or is he picking the money manager that just paid for his way to Point Clear, Alabama?'"

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