Bureau aide told to 'give MDL a break'; records released by Taft say Conrad gave the order

6/14/2005

COLUMBUS As multimillion-dollar losses by a Pittsburgh investment firm mounted last year, the chief financial officer of the Ohio Bureau of Workers Compensation told another top agency official that he had been told to give MDL a break, according to records released yesterday by Gov. Bob Taft.

The records stated that Terrence Gasper, removed from his post after the bureau lost $215 million in the hedge fund managed by MDL Capital Management, told a fellow official that the instructions had come from the former administrator of the bureau, James Conrad, who had been asked by George Forbes, a member of the bureau s Oversight Commision, to go easy on MDL.

Mr. Forbes daughter, Mildred Mimi Forbes, is an executive with the investment firm.

The records released by Mr. Taft, which were compiled by the bureau, also state that Mr. Conrad and Mr. Forbes deny issuing instructions to give special treatment to the firm.

have both resigned their posts with the bureau following revelations of failed bureau investments.

Ohio Attorney General Jim Petro has filed a lawsuit against MDL in Franklin County Common Pleas Court. The suit alleges fraud and breach of contract. The state s inspector general is also investigating the $215 million loss.

Fed with a steady diet of Treasury bonds, mortgage-backed securities, and corporate bonds, the fund managed by MDL for the Bureau of Workers Compensation grew steadily.

Starting with $55 million in 1998, the fixed income assets fund had an average rate of return of nearly 7 percent over five years.

The bureau responded by adding $100 million in 2002 and $200 million more in 2003.

But in September, 2003, the bureau agreed with a proposal from MDL to move $100 million from the long-bond fund to an active duration fund, which would act like a hedge fund.

The market value of the ADF fund dropped from $94.8 million in March, 2004, to $62 million the next month.

Despite an injection of $125 million from the bureau s investment portfolio, the market value of the ADF plummeted to $88.4 million in August, 2004 and then to $7.1 million in November, 2004.

Monthly reports released by the bureau yesterday under the state s Open Records Act document the rapid decline of MDL s fund.

Yesterday, bureau spokesman Emily Hicks said she could not explain why the bureau didn t pull out of the active duration fund in spring, 2004.

According to documents released yesterday, Mark D. Lay, the firm s chairman and chief executive officer, went to Columbus in March, 2004, to meet with James McLean, the bureau s chief investment officer.

Mr. McLean told Mr. Lay to produce more timely and detailed reports for future monitoring of the short [fund]. Losses seemed inconsistent with bond movements, according to bureau notes.

In April, 2004, Mr. Lay changed his strategy and the market turned against the fund what should have been a month of great recovery instead cost the fund $32 million due to Lay s decisions, according to a chronology released by the bureau.

A month later, the bureau s former chief financial officer, Mr. Gasper, approved an additional $100 million to MDL.

The bureau added $25 million in September, 2004.

On Sept. 27, 2004, Mr. Conrad, the bureau s administrator-CEO, was giving a speech in Cincinnati when he received a call from his chief operating officer, Tina Kielmeyer.

She told Mr. Conrad that an employee had told her about an investment gone bad.

That evening, Mr. McLean told Mr. Conrad in a conference call that Mr. Gasper had told him to report only positives to Mr. Conrad during one-on-one meetings.

Mr. McLean said that when he wanted to tighten the screws on MDL, Mr. Gasper had told him that Mr. Conrad had given permission to give MDL a break.

Mr. Conrad said that was untrue, according to records released by the governor s.

Mr. McLean said Mr. Gasper had told him that George Forbes, a member of the bureau s Oversight Commision, had called Mr. Conrad to discuss giving MDL a break.

According to the records, Mr. Conrad then called Mr. Forbes, who adamantly denied having called Conrad.

Mr. Conrad alerted Gov. Bob Taft s chief of staff, Jon Allison, and a high-ranking Taft aide, Jim Samuel.

On Oct. 5, 2004, Mr. Conrad met with Mr. Gasper, who did not confirm or deny accusations raised by McLean.

The following day, given a choice of being fired or resigning, Mr. Gasper resigned, citing health reasons.

But it wasn t until last week that the state disclosed the $215 million loss.

Ms. Kielmeyer, the bureau s interim administrator, has said the bureau believes MDL acted outside the scope of the contract.

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

Mr. Lay didn t return a call seeking comment yesterday.

The bureau s timeline of the MDL issue released yesterday by the governor s office referred to the ADF fund being unusual in that it did not cap BWC s indemnification of the fund; it ceded legal jurisdiction and choice of laws to the country of Bermuda; and it contained a liberal termination clause.

Yesterday, state Sen. Marc Dann, a Democrat from suburban Youngstown, asked Mr. Taft for copies of weekly reports from Mr. Conrad.

Mr. Dann asked Mr. Petro for documents about the hiring of special counsel in October, 2004, to review MDL s activities.

Contact James Drew at:jdrew@theblade.com or 614-221-0496.