STATE OF TURMOIL

Workers' comp bureau concealed $215M loss

Taft, Petro knew about fund's woes many months ago

6/8/2005
BY MIKE WILKINSON AND JAMES DREW
BLADE STAFF WRITERS

COLUMBUS -- Democrats were screaming cover-up yesterday after state officials admitted that a high-risk hedge fund that the embattled Ohio Bureau of Workers Compensation had invested in had lost $215 million in just a few months last year.

The bureau acknowledged that the fund, managed by a Pittsburgh-based investment firm, lost the money between February and September, 2004. MDL Capital Management relinquished control of the fund in November.

Although the bureau has known about the losses since September, it wasn't revealed until yesterday, a day after The Blade began making calls upon learning that state investigators had uncovered huge losses at the bureau.

A spokesman for Gov. Bob Taft said last night that Mr. Taft had been told in September that there was an investment loss at the bureau a loss of $10 million to $20 million.

Bureau records show that Attorney General Jim Petro's office also was informed of the investment loss in September. Spokesmen said Mr. Taft and Mr. Petro did not learn the full extent of the loss until yesterday.

State Rep. Chris Redfern (D., Catawba Island) was among legislators who were shocked by the news.

"It begs the question, 'Where was the oversight?' It looks to me that the Bureau of Workers Compensation needs to hire an independent forensic auditor within the department itself. There seems to be no one in charge.

"Somebody tried to cover this up," said Mr. Redfern. "The bureau, by its own admission, fired its chief financial officer and never told us why."

For the first time in weeks, the talk out of the bureau wasn't about rare coins and Tom Noe. Instead it focused on hedge funds and MDL, a Pittsburgh firm with clients across the country.

The investments with MDL are unrelated to the bureau's coin funds managed by Mr. Noe, a prominent Toledo-area coin dealer. But the news of the MDL losses were revealed just a day after the Ohio Ethics Commission reported expanding its probe into whether bureau employees complied with state ethics laws. Earlier yesterday, before news of the MDL losses were reported, Inspector General Tom Charles confirmed that his office was investigating other bureau investments.

Jeremy Jackson, spokesman for the bureau, would not comment on whether the Noe investigation uncovered the MDL losses.

"There are investigations going on, including the [Ohio] inspector general," Mr. Jackson told The Blade, which first uncovered the bureau's rare-coin investment on April 3.

Actions questioned

Mark D. Lay, chairman and chief executive of MDL Capital Management.
Mark D. Lay, chairman and chief executive of MDL Capital Management.

Tina Kielmeyer, the bureau's interim administrator, said the bureau believes MDL's fund managers acted outside the scope of the contract and the bureau could take civil or criminal action against the appropriate parties.

Ms. Kielmeyer disclosed yesterday that Terry Gasper, the bureau's former chief financial officer, was forced to resign last year because of the losses. Earlier this year, however, bureau officials told The Blade that Mr. Gasper left for health reasons.

James Conrad, forced by the unfolding Noe rare-coin scandal to resign as the bureau's administrator, told Ms. Kielmeyer in his last meeting with her that the investment loss would require her "immediate attention."

She said she and a management review team appointed by Mr. Taft Friday are looking for other questionable investments.

"We are scouring all of the investment records to ensure that all of the proper protocols were followed," she said.

Mark D. Lay, the chairman and chief executive of MDL, defended the fund and the losses. He said the "active duration fund" was a hedge fund that gambled that long-term interest rates would rise. If they had, the hedge fund would have made money, offsetting expected losses by the bureau's overall bond funds.

When long-term rates instead fell, the value of the hedge fund plummeted. Mr. Lay said that means the other funds gained in value; however, the bureau could not confirm that last night.

"We've done nothing outside the scope of the contract," Mr. Lay said. "It was a simple overlay strategy done through a hedge-fund vehicle."

Ms. Kielmeyer, in a memo to Governor Taft yesterday about the loss, offered a chronology that both answers and raises questions about the deal.

Mr. Conrad wasn't told about the losses until they had already occurred, although Jim McLean, the bureau's chief investment officer, was aware of them.

Like a hedge fund

The bureau hired MDL in 1998 and over time invested $355 million in a long-bond fund with the firm. For years, the bureau reported that the MDL fund performed well.

But in September, 2003, the bureau agreed to a suggestion from MDL to create an "active duration fund," which would act like a hedge fund. Mr. Gasper reallocated $100 million from the long-bond fund into the ADF fund. Later, another $125 million was moved into the hedge fund for a total of $225 million.

The first inkling of problems surfaced in March, 2004, when the fund lost $7 million. Ms. Kielmeyer, in her memo to Governor Taft, said that Mr. McLean was assured that the managers would change their strategy. However, after recovering a bit in May, 2004, the fund went into free fall.

"The $225 million investment had no value at the end of September," the memo stated.

Then, Ms. Kielmeyer, who was then assistant administrator, took a call from a bureau staff member who alerted her to the losses. She told Mr. Conrad who then grilled Mr. McLean. The bureau ordered MDL to close the fund in 60 days. During that time, it recovered $9 million.

In her memo, Ms. Kielmeyer said the bureau believes the fund managers "leveraged the fund beyond contractual risk parameters."

Ms. Kielmeyer also said "it's questionable" whether the investment fit into the parameters of the bureau's investment policy.

Mr. McLean was put on paid administrative leave yesterday, pending a management review of the situation.

In a brief interview with The Blade on Monday, Mr. McLean said he didn't know if the bureau had invested in hedge funds. He directed all calls to Mr. Jackson. Mr. McLean was unavailable for comment yesterday.

Bill Burga, president of the Ohio AFL-CIO and a member of the bureau's Oversight Commission, said he didn't know about the $215 million investment loss until yesterday.

"Conrad said nothing, to my recollection. There's so much going on, I don't know what we are told or not told," Mr. Burga said.

Mr. Gasper was also a central figure in the funding of Mr. Noe's rare-coin fund. Attorneys for the Maumee coin dealer recently acknowledged that $10 million to $12 million is missing from the fund.

Robert Cowman, the former chief investment officer of the bureau, told The Blade earlier this year that he handled the Noe account himself, rather than hand it off to his investment staff, as is done with almost all other investment managers.

He said Mr. Gasper was the only other person he talked with regularly about the rare-coin funds that are now the focus of intense scrutiny from state and federal authorities. The bureau and Mr. Noe agreed last month to dissolve the funds.

Mr. Gasper was also investigated by the bureau in February, 1997, after allegations were made that he tried to steer bond work to a Cleveland bank in conjunction with Paul Mifsud. At the time, Mr. Mifsud, who died in May, 2000, was a consultant and a former chief of staff to then-Gov. George Voinovich.

A written reprimand

On Feb. 24, 1997, Mr. Conrad gave Mr. Gasper a written reprimand for failing to reimburse the bureau for the cost of long-distance phone calls.

"It has been brought to my attention that approximately $150 in personal, long distance charges have been incurred by you without any type of reimbursement being offered," Mr. Conrad wrote.

Bureau investigators began interviewing employees about the bond-steering work the day after the reprimand. In the end, the bureau said it could find no evidence that Mr. Gasper did anything improper.

In its report, the investigators wrote: "He [Gasper] stated that another reason why he thinks he receives no pressure is because people know Jim Conrad is honest and has let everyone know that BWC will not play games with investments or anything else."

Mr. Mifsud, who served as the governor's chief of staff from 1991 to 1996, pleaded guilty in 1997 to two misdemeanors: obstructing official business and an ethics violation. He spent six months in a prison work-release program after pleading guilty to accepting a home-improvement project at a cut rate from a contractor who had received millions of dollars in unbid state contracts.

In an earlier story, The Blade reported that Mr. Noe identified Mr. Mifsud, a coin collector himself, as someone who had helped him get coin business.

Mr. Lay, who has contributed to Democrats at the federal level, and Steve Sanders, MDL's president, have contributed $9,000 to Ohio Republicans, including Governor Taft, Auditor Betty Montgomery, former treasurer Joe Deters, and former House speaker Larry Householder.

He said the contributions were made to candidates whose ideas he supported and were unrelated to his contract with the bureau. Mr. Householder was an "up-and-coming guy" who was known across the country, he said.

'I got something in the mail [for Mr. Householder] and I took care of it," Mr. Lay said.

The $2,000 contribution was recorded on Dec. 12, 2003, a few months after the bureau's hedge fund was created by Mr. Lay's firm.

None of recipients of his campaign contributions, Mr. Lay said, was in a position to influence the bureau.

"I don't want to make this some political article, he said. It's an investment article.'

That's not how Democrats in Columbus see it.

'This was pay-to-play'

Tina Kielmeyer
Tina Kielmeyer

"This was pay-to-play," Mr. Redfern said.

In mid-April, The Blade reported that Ohio Republicans received more than $455,000 in campaign contributions from employees of the fund managers hired by the bureau for the "emerging managers" program in which Mr. Noe participated.

The big winners included the state Republican Party committees, which received $200,750, Secretary of State Ken Blackwell, who received $67,130, and Governor Taft, who got $61,875.

Mr. Lay also confirmed that Mildred Forbes, the daughter of George Forbes, the vice chairman of the bureau's Oversight Commission, works for his firm. Ms. Forbes is a senior vice president who works on human resources and compliance issues for MDL.

The two met at a conference while she was working for an Ohio investment firm. She has worked for MDL for about three years, Mr. Lay said.

Yesterday, news of the hedge fund and its losses triggered a reassessment of Mr. Conrad's tenure, which some say had only been marred by the coin-fund scandal.

"While most folks in and around Capitol Square had a degree of respect for the former director, these kinds of developments really put a dim view on director Conrad and what his role was at the bureau," Mr. Redfern said.

Ms. Kielmeyer defended how Mr. Conrad handled the investment loss.

"He began the investigation. The timeline shows he acted in a responsible and aggressive manner to bring full scrutiny, and to seek to correct the wrongs that were done," she said.

State Sen. Eric Fingerhut (D., Cleveland), who was recently appointed as a nonvoting member of the bureau's Oversight Commission, said he was 'completely outraged" by the news that the bureau had lost $215 million in the investment.

He said he will push for the Oversight Commission to transfer authority of the bureau's investment to the state treasurer's office. He noted that the administrator of the bureau hires the chief investment officer, but it is done in consultation with the Oversight Commission.

'Clearly, the chief investment officer needs to go," Mr. Fingerhut said. "As I've made abundantly clear, the BWC should not be in the investment business. They have shown they can't do it for substantive and political reasons."

As word of the MDL losses filtered throughout Columbus, state officials reacted with caution or in the case of Governor Taft, refused to meet with reporters.

He would not do a telephone interview with The Blade yesterday about the investment loss. An aide said he was too busy working on the state budget.

Mr. Taft refused to comment when approached by a Blade reporter as his driver delivered him to the governor's mansion in the Columbus suburb of Bexley at about 6:15 p.m. yesterday.

"Call the office," Mr. Taft said, referring all questions to spokesman Mark Rickel.

A state trooper then asked the reporter to leave the grounds as Mr. Taft entered the mansion.

Attorney General Petro was in Springfield last night and was not available for comment, an aide said.

Kim Norris, a spokesman for Mr. Petro, confirmed that the bureau asked the attorney general's office in October to appoint a special counsel to review the activities of the fund manager.

The firm of Schottenstein, Zox, and Dunn was hired on Nov. 2, 2004. That firm already was doing work on behalf of the bureau, Ms. Norris said.

Mr. Petro, who is seeking the GOP nomination for governor in the 2006 election, didn't inform the public about the investment loss because the attorney general is the bureau's attorney, his spokeman said.

"He will do his job first. His job is first to be the attorney general and he will continue to work for his client, which in this case is the Bureau of Workers Compensation. If this fund manager has done anything outside the contract, we will on behalf of BWC pursue damages," Ms. Norris said.

Jen Detwiler, a spokesman for State Auditor Betty Montgomery, said her office has not been given any specific information pertaining to an MDL fund.

"We are not currently aware of any situation involving an MDL fund," she said.

Ms. Detwiler said the auditor has jurisdiction on reviewing previous audits from funds like Mr. Noe's Capital Coin funds and MDL. "We do review past audits," she said.

But why the previous audits weren't brought to the attention of the auditor, Ms. Detwiler said, We'd like to know the answer to that as well. That's something we ll be taking a look at as well.

Secretary of State J. Kenneth Blackwell, a Republican, repeated his May 27 request that the Public Integrity Section of the U.S. Department of Justice take control of the investigation into the bureau's investments.

"As it relates to this widening scandal, there is clear and commanding evidence that we need the feds involved in this investigation in a wider way," Mr. Blackwell said. "This is a serious, serious issue. State investigators cannot do the job. They don't have all the authority that they need to dig as deep as they can dig. And the integrity of the investigation rests in the believability of its independence."

Last month, the bureau's Oversight Commission voted to increase private employer premiums by an average of 4.4 percent, starting July 1.

But Mr. Jackson said adding the $215 million investment loss to the $10 million to $12 million missing from the state's rare-coin investment wasn't a factor in the premium increase approved last month.

Contact Mike Wilkinson at:mwilkinson@theblade.com or 419-724-6104.