Oregon AG: Investment manager loots millions from PERS
A "bid-rigging" scheme dreamed up by a New York money manager bilked millions out of Oregon's pension program, state officials allege.
Instead of safeguarding the Public Employees Retirement System, investment manager Edward Shugrue III and his firms staged a series of phony debt auctions — enriching the CEO and his close associates — according to newly filed civil litigation.
Rosenblum told the Tribune her financial fraud team keeps a sharp watch over the pension fund. "No investment firm is above the law," she said.
Lawyers for the 55-year-old Manhattanite deny the allegations and plan to file a vigorous affirmative defense later this month. "Oregon made a lot of money on these investments," said attorney Ken Breen, calling his client's actions "completely transparent."
Shugrue has since 2004 overseen a slice of PERS, which currently pays out some $390 million a month to the state's 153,000 retired government employees.
He lost the fund some $100 million during the 2008 financial crisis, according to press reports, but kept up his contracts and, by September 2012, was controlling some $425 million in PERS capital, per the suit. (The PERS fund is worth nearly $80 billion in total).
By 2014, Shugrue's company allegedly had only one remaining institutional investor — PERS — so the CEO launched a new investment fund to drum up $100 million from fresh clients.
At Talmage's suggestion, PERS became one of three anchor investors in this new fund, per the suit, which then attracted another $55 million from an unidentified overseas insurance company and a private company pension. These new investors could be charged much higher fees than the 0.50% Shugrue's company got from PERS annually, according to the litigation.
That when the chicanery began, state lawyers say.
First, Shugrue sent a memo to PERS saying it would be in the pension's "best interest" to sell the mortgage of the posh Inn of Chicago to his new investment fund at 50% of its face value, according to the litigation. Talmage, the state attorneys say, had gotten a peek at the hotel's books, and therefore knew its true value, because they were servicing the mortgage through a side deal.
But the mortgage, which had been split into three collateralized debt obligations known as CDOs, was contractually required to be auctioned off, not sold, per the suit.
"Talmage misled the CDO trustee to convince it that (the investment fund) had won a competitive auction process when, in reality, none had occurred," according to the lawsuit. "Talmage simply fabricated competing bids."
The trustee got wise and asked for proof of the competing bids for the third and final auction, so Shugrue's employees called up two unidentified Wall Street firms and asked them to submit low-ball numbers, the suit says.
"I won't hit you on this, but I need a bid," a Talmage rep told one of the traders, the suit alleges.
After winning the third auction, Shugrue's new investment fund sold the mortgage at a "real, bona fide competitive auction" for 80% of its value — netting $18 million in profit, per the suit.
As an investor with a 64% stake in the fund, PERS stood to gain roughly $11 million, but Shugrue then sent out a letter to "friends and family" investors, offering them a chance to buy in before the deal went through, the litigation alleges.
That bolstered the investment fund by $27 million — including $5 million from Shugrue himself and $2 million from his son's trust fund — diluting PERS' stake in the fund to 55% and decreasing the pension's resulting share of the profit by nearly $2 million, the suit says. That cash infusion before the hotel sale closed paid out $700,000 in profit sharing to Shugrue and his family trust, the suit claims.
Rosenblum is seeking to recoup the $6.6 million in fees charged by Talmage between August 2014 and January 2018, when Shugrue's contract with PERS ended, as well as other damages.
"Talmage and the others did nothing wrong here," said Breen, Shugrue's lawyer. "We plan to fight this civil lawsuit in court and we are confident that we will prevail."
The attorney general issued her own ultimatum: Pay up, or else.
"Point blank, Talmage and these companies took advantage of Oregonians and the state," she said. "We are determined to do all we can to hold them accountable and make sure the pension fund gets back what it is owed."
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