Lee Zurik Investigation: ‘Playing With Fire’… and Joe Meals
What would you do with 50 dollars? Grab a casual bite to eat, maybe fill up your car with gas.
For every New Orleanian, $50 of their money will likely have to go into the New Orleans Firefighters Pension and Relief Fund -- for the failure of one investment.
"If the taxpayers have to fill that hole, it's a legitimate question for the taxpayers, 'why should I have to do that do that?'' says Mayor Mitch Landrieu.
In 2008, the board voted to invest $15 million into a hedge fund run by New York-based Fletcher Asset Management, guaranteeing the New Orleans firefighters a 12 percent rate of return.
"No one can guarantee 12 percent rate of return," says financial analyst George Pennacchi. "That should be a red flag that perhaps the credibility of the hedge fund is not that high."
Fletcher told the board an outside investor would put up $50 million. That investor would lose money first before the Pension Board would see any loss -- in the board's mind, giving them extra insurance.
When the firefighters tried to withdraw money, they got an IOU instead. It's now being battled out in court.
Pennacchi says, "A bankruptcy court judge has stated the assets of this hedge fund are pretty close to worthless. It's going to be a large loss the firefighters fund will take."
The firefighters defend the investment decision. "We've gotten better than 12 percent on our returns," says Board CEO and Secretary-Treasurer Richard Hampton.
The person who sold them on it is a Memphis-based investment consultant named Joe Meals.
Meals works for Consulting Services Group, or CSG. The company paid $150,000 a year by the pension fund for investment advice. Pennacchi says, over the last 10 years, Meals' investments have produced negative returns: "Their rate of return seems to have been quite low and performed substantially low, substantially below the average state and local pension fund during that time."
But there's more to Joe Meals' story than these investment decisions. You see, Meals can't work for any private company -- he's been sanctioned by the Securities and Exchange Commission for ordering employees to back date ethics forms. Under a 2009 settlement with the Department of Labor, Meals and his company also repaid almost $300,000 to private pension plans for not producing timely rebates.
"We investigated all of those and if you look and read those sanctions, much had to do with very little," says Hampton. "No clients lost any money or any of those things that went through those SEC investigations."
Meals works for a few other systems in Louisiana. But the New Orleans Firefighters Pension Board is the only system that appears inclined to keep him.
"I think Joe Meals is an outstanding consultant," says Hampton. "I think he has done a phenomenal job."
Representative Kevin Pearson (R-Slidell) heads the state's Retirement Committee. "I don't think there's anything that could make me feel comfortable about Joe Meals advising any of our retirement systems in the state or local systems" says Pearson. "I think they can do a lot better."
Pearson has no official oversight of the New Orleans board, but he knows Meals and his investment decisions. Pearson says the Fletcher investment is just one example of poor advice.
"We don't have this happening anywhere near to this extent in any retirement system he's not a part of," Pearson tells us.
Meals' company, CSG, also runs a charitable organization called the AIM Charity. Buried in the firm's brochure, on file with the Securities and Exchange Commission is a potential conflict.
Meals' company admits the potential conflict exists -- CSG may be more likely to recommend investment groups that donate money to the AIM Charity. CSG could potentially recommend an investment group to the New Orleans firefighters, because that investment group gave money to the charity;
We noticed a few investment managers who donated to that charity and have placed investments from the New Orleans firefighters.
It leads us to ask, whether Meals is looking out for the charity or his client.
"It's concerning " says Pearson. "And I mean these are… this is the retirement of these guys. They worked very hard. If you work 30 years or less, you're counting on this, you're depending on these funds."
The firefighters are depending on millions of dollars of now delinquent funds.
With Meals as investment manager in 2003, the fund made a $5 million loan to American Pension Consultants. The loan had a 9.5 percent interest rate -- the firefighters admit they'll collect none of the interest. Almost a decade later, $3.3 million of that loan hasn't been repaid.
In 2007, the fund loaned $1.5 million to Stephens Garage building -- the interest rate, 12 percent. The principal and interest are due in April of 2010. As of now, the balance of the note remains $1.5 million. An audit shows the collectability of the interest is deemed to be uncertain.
That's millions of potentially lost dollars in loans that will have to be covered by firefighters or city taxpayers.
"The stated interest rates on loans are quite high, which again is a signal that these loans probably carry quite of bit of risk," says Pennacchi.
With Meals as investment manager, the fund has also invested in movies. The fund put money into Dirty Movie Two, filmed here in New Orleans at the FOX 8 studios. This movie will go straight to DVD. The fund hasn't yet collected on the investment.
Pennacchi says, "One has to question whether pension fund managers really have the expertise to evaluate the success of a movie, which is of course what we probably all know [is] highly speculative."
"It is past the time in which we were supposed to receive our money," says Hampton. "The manager came to us and [said] I'll be glad to deliver those options to you in which we will have the opportunity to make a great deal of more money."
The underfunding is significant. Documents show the fund can only cover 37 percent of its liabilities, the liabilities being current and future retirement benefits to firefighters. That's one reason taxpayers put $30 million into the fund every year. And to keep it solvent, taxpayers will have to put in hundreds of millions more.
"For every dollar the taxpayers send me, I have to write a check for 10 cents to the Firefighters Pension Fund," says Mayor Landrieu.
But the situation is likely even more dire. Remember -- the audit shows the fund can only pay out 37 percent of its liabilities.
Pennacchi tells us, "That measure of underfunding is based on accounting rules that only public pension funds can use, and these accounting rules tend to understate the true amount of underfunding. So my guess is that the pension fund probably only has about 25 percent of value of its liabilities in current assets."
If Pennacchi is right, it means that $50 bill, owed on that one investment loss, will grow. Every New Orleans taxpayer will have to put up nearly $1,000 to plug a $325 million hole in the pension fund. The mayor blames much of that on poor investment decisions by the board and investment manager Joe Meals.
"We did things that we felt could a get better return for this fund," Hampton says. "It might have been a little different than traditional investments that a lot of other folks have... It's still in the process of working, Lee. We're in a pretty depressed real estate market and a lot of our real estate investments are still holding their own."
CSG Attorney Richard Nummi sent us a statement on this report. To read the entire statement, click here.
Nummi responded to a number of points of our story. In part, he wrote:
FLETCHER INVESTMENT: "Unfortunately, Fletcher violated certain terms of the agreement and misrepresented the value of the investments in the fund. This misrepresentation gave the appearance that the collateral provided by the subordinated investors remained intact, which now appears to be in question and has resulted in a court ordered liquidation of the fund under the direction of a Special Liquidator appointed by the Court."
AIM CHARITY: "Last year there were 81 money managers who provided sponsorships ranging from $2,000 to $5,000 each, of which only 4 were managers that have a relationship with the NOFPRF."
SETTLEMENT WITH SEC: "Mr. Meals made a mistake in asking the employees to backdate the acknowledgement form but it was not a malicious action on his part. He paid a $10,000 fine for his mistake."
DEPT OF LABOR MATTER: "CSG identified the error, corrected it and paid the clients the $278,000 that they should have received and self-reported the mistake to the DOL. Mr. Meals was the Chief Compliance Officer for the firm during the time of the miscoding and thus accepted responsibility for the mistake since he had failed to detect the error."
ON INVESTMENTS: "As to their heavy allocation to real estate, first it should be noted that approximately 18% of their portfolio or 40% of their real estate allocation is associated with Lakewood. This was initially intended to be a much smaller allocation but after Katrina, plans had to adjust. Furthermore, if one looks at the asset classes that have performed over the past 20 years, according to a report issued by JP Morgan Asset Management the annualized return for real estate over the 20 year period ending 12/31/11 was 10.9%. Oil which was the next highest performer was up 8.6% and all other assets including the s&P500, Gold, Bonds, International Stocks and inflation were all below 7.8%."