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Published: Friday, 7/8/2005

STATE OF TURMOIL

Firm fired after losing $71M from BWC

Officials blame fund managers

BY STEVE EDER AND JOSHUA BOAK
BLADE STAFF WRITERS
Tina Kielmeyer, interim director of the Ohio Bureau of Worker's Compensation, left, and Tom Hayes, director of the Ohio Lottery Commission. Tina Kielmeyer, interim director of the Ohio Bureau of Worker's Compensation, left, and Tom Hayes, director of the Ohio Lottery Commission.
MORRISON Enlarge

COLUMBUS -- The Ohio Bureau of Workers Compensation is severing ties with a politically connected investment firm that lost $71 million, the bureau announced yesterday.

Bureau officials yesterday blamed $60 million worth of those losses on "management decisions" by Allegiant Asset Management, a wholly owned subsidiary of Cleveland-based National City.

In 2001, the bureau transferred $250 million to Allegiant from other equity funds, but within two years the investment had lost $70 million and the agency began to withdraw its stake.

Yesterday's announcement was made in the wake of revelations that the bureau lost $215 million in an unregulated offshore hedge-fund run by MDL Capital Management and that up to $13 million in assets are missing from a $50 million rare-coin venture with Tom Noe, a Toledo-area coin dealer.

Gov. Bob Taft has appointed a panel to review all of the bureau's investments, and Ennis Knupp, a financial consulting firm, was hired to audit returns and bureau investment managers.

"Ennis Knupp is on the ground and they are going through each investment," said Tom Hayes, director of the Ohio Lottery Commission, who is overseeing the bureau's investment review. "And as they find ones that don't reach their test for performance, we are eliminating them. This won't be the last one."

Questions abound

Yesterday, Allegiant officials defended themselves against criticism of their performance, saying they kept bureau officials regularly informed about developments with their investment and that they had no "forewarning" of the agency's plans to terminate the venture.

Still, political opponents are questioning why it took a full-blown scandal and more than year for the bureau to announce its $70 million investment loss and plans to liquidate its remaining investment with Allegiant.

State Sen. Marc Dann, a Democrat from suburban Youngstown, said Allegiant's losses offer more evidence that political contributions influenced the bureau's financial decisions.

National City's employees and its political-action committee have contributed more than $1 million to Ohio politicians and state and county political parties since 1990, with most of the money directed toward Republicans. Mr. Noe also was a key Republican campaign contributor and fund-raiser, and MDL executives gave money to candidates from both parties.

"These were extraordinarily well-connected campaign contributors at National City Bank," Mr. Dann said. "For years, [the bureau] just allowed the losses to mount without taking any action against their political benefactors."

The Ohio GOP and its House and Senate committees has received $269,300 from the bank's PAC and employees. The Democratic Party has received $51,251 since 1990.

Individually, National City contributed $61,975 to Gov. Taft's campaigns; $50,737 to Sen. George Voinovich during his gubernatorial campaigns; $50,250 to former state Treasurer Jim Deters, and $37,152 to Jim Petro, now Ohio attorney general.

"Reform is desperately needed in Columbus," House Minority Leader Chris Redfern, of Ottawa County's Catawba Island Township, said in a statement. "Unfortunately, the appearance of corruption is so strong after 12 years of complete one-party rule that the only way to restore trust is through a truly bipartisan investigation."

Allegations rejected

Kelly Wagner, a spokesman for National City and Allegiant, said the investment firms abide by all state and federal rules when making campaign contributions.

"In addition, managing public funds is a result of a bid process," she said in a statement released to The Blade. "I can assure you that any support of candidates or ballot initiatives is unrelated to our fund management."

Mark Rickel, a spokesman for Governor Taft, dismissed claims that the bureau was patient with the fund, despite its failures, because of the political contributions from the company.

"We didn't know about the investment until the management review team and administrator [Tina] Kielmeyer [got] through the entire portfolio," said Mr. Rickel, adding the governor and his staff were not aware of the fund's losses.

"This is what we are trying to get to the bottom of. The governor has said there were problems with the bureau's investments and let's get people in place to do the review of the procedures and controls, and the entire portfolio, and let's get it cleaned up."

Ms. Kielmeyer, the bureau's interim administrator, gave the order to fire Allegiant based on the recommendation of consultant Ennis Knupp, which confirmed the losses.

"While we appreciate their attempts to improve the management of this fund, we cannot ignore the historical track record of an underperforming investment," Ms. Kielmeyer said in a statement yesterday. "We owe it to Ohio workers and businesses to invest intelligently and make sound financial decisions with their monies."

If we remain idle and hope for a rebound, we would be acting irresponsibly and failing those customers we're trying to help most the injured workers and employers of Ohio.

After losses of $50 million in 2002 and $20 million in 2003, bureau officials withdrew $75 million from Allegiant in April, 2004, and another $50 million in May, 2005. By the end of this May, the investment's market value was $53.4 million.

Despite the stagnant returns and diminishing size of the investment, Allegiant did not anticipate being fired.

"We had no forewarning before this afternoon," John Abunassar, Allegiant's executive vice president of institutional asset management, said yesterday.

The Allegiant fund was a large cap growth stock portfolio, meaning that the bureau was investing in companies with a market capitalization greater than $10 billion and high profit expectations.

The stocks in a portfolio like that are a Cisco, or a Pfizer, Mr. Abunassar said. A person could look over a list of them and recognize each one. They were all household names.

'Total transparency'

Large cap growth stocks with a long-term outlook are a common strategy for Allegiant's clients.

Most clients that we work with look in the area of a five-year time horizon, he said.

Mr. Abunassar emphasized that Allegiant kept the bureau updated with monthly reports containing details on each holding.

We maintained total transparency and integrity with how we managed their assets and the specific securities within the portfolio, he said.

Allegiant, which was known as National City Investment Management Co. until last month, controls $27.4 billion in assets.

Bureau spokesman Jeremy Jackson declined to say if the bureau would have fired Allegiant had it not been for revelations about the rare-coin investment and MDL.

That's a question that is somewhat speculative, he said.

While the bureau blames the fund's losses on poor decisions, Mr. Jackson said he was unaware of the investment's strategy or the individual stocks acquired and sold by Allegiant. He emphasized that fund's losses have already been calculated into previous financial statements, meaning no new subtractions will need to be made from the bureau's $14.3 billion bottom line.

Mr. Hayes, who is overseeing the review of the bureau's portfolio, said each fund is being analyzed, and decisions are being made about which fund managers will be terminated. Last week, the bureau announced it was investigating its relationship with Brantley Partners, a money manager facing an informal probe by the U.S. Securities and Exchange Commission.

You ll see things coming out on a regular basis now, he said.

Blade staff writers Mike Wilkinson and James Drew contributed to this report. Contact Steve Eder at:seder@theblade.com or 419-724-6728.



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