The state Board of Investment wants to know if it has any say regarding recently revealed developments in the Treasurer’s Office.
At a July 24 special meeting of the board, members Bill Bell and Felecia Rotellini asked Treasurer David Petersen and Rex Nowlan of the Attorney General’s Office if the board’s responsibilities or authority include dealing with falsification of reports on the state’s financial portfolio and a controversial payment authorized by Mr. Peterson to the AG’s office for legal fees.
“The board has a responsibility to set investment policies,” Mr. Petersen said. “I don’t think your responsibility goes beyond that.”
The state Constitution calls for the legislative establishment of an investment board to serve as trustees of the permanent state land funds and to manage the assets of the funds. The board also may order the sale of questionable securities, Mr. Nowlan said.
Mr. Bell, who at a monthly board meeting July 21 complained he wasn’t aware of a “window dressing” incident and a $1.9 million payment to the AG’s office until he read about them in Arizona Capitol Times, said he wants clarification of whether the board should have been involved in those issues.
Arizona Capitol Times reported earlier this month that a trader in the Treasurer’s Office quit after twice being warned not to falsify portfolio reports. The window dressing was done to make a mid-month report look better than it actually was, but the incident did not affect the investments, a source close to the situation said.
“While I don’t think we have direct responsibility for managing staff here,” Mr. Bell said, “the fact of the matter is that whatever a staff person does with respect to handling funds… where do we come in?”
Board’s authority questioned
Board member Ross Jacobs, Yavapai County treasurer, said that when employees mess up, “It ultimately still falls on that elected official.”
Mr. Nowlan said window dressing is unethical and illegal, but the board might not have authority regarding the incident.
“To the extent that those investment policies are not being complied with, I think this board has an obligations to express its concern or disapproval of those transactions, and if there are inappropriate securities purchased, require sale of those inappropriate securities,” he said. “But I think the board has much difficulty going beyond that…”
Mr. Petersen told the board he recused himself negotiations with the AG’s office regarding the payment made for legal fees in the fraud settlement case involving National Century Financial Enterprises. He said his part-time special assistant Don Dybus negotiated the payment with the AG, but he authorized the payment.
Mr. Petersen’s chief deputy Blaine Vance was waiting for a written opinion from the state solicitor general regarding whether the AG was due the money and delayed the payment, which was due June 30.
Mr. Petersen, who is under investigation by the AG’s office for several alleged felonies, said he approved the payment based on an independent verbal opinion by the solicitor general and has requested a written opinion.
The Treasurer’s Office, 200 local Arizona governmental entities and many governments in other states invested in National Century Financial Enterprises, which made loans to inner-city Medicare hospitals, until it collapsed in 2002 in a fraud scandal involving $3 billion in losses to all investors, including $131 million in Arizona.
“There were substantial, sophisticated investors in the fund,” Mr. Nowlan said. The state received approximately $14 million and local governments, who were represented by a Texas law firm, have received approximately $38 million in the settlement.
Mr. Bell asked why the state, which the solicitor general says is required to pay 35 percent of its recovery to the AG’s office, takes “such a big hit?”
“I’m not trying to set up a fight with the Attorney General’s Office,” Mr. Bell added.
He and Ms. Rotellini requested Mr. Nowlan to seek an opinion from the attorney general as to whether the board should have had involvement in the decision to pay the AG because the settlement funds were directly related to investments.
“What I want to know is precisely where the board stands,” Mr. Bell said.
“We have the right to ask questions and get answers,” Ms. Rotellini said.