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COLUMBUS — Gov. Bob Taft’s office learned seven months ago — not this week — that the Ohio Bureau of Workers’ Compensation had lost $225 million in a high-risk investment.

In an Oct. 26, 2004, e-mail to Taft aide James Samuel, the bureau’s administrator-CEO, James Conrad, wrote that the “entire value” of the portfolio managed by MDL Capital Management was down about $225 million.

Mr. Conrad also alerted the governor’s office that the bureau had rejected MDL’s request for another $25 million and the firm was in danger of collapsing, which he said would be “likely to make national news.”

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The e-mail from Mr. Conrad to Governor Taft’s office explained that MDL Capital Management managed two investment products — a long-term bond fund started in 1998 and an “Active Duration Fund.”

“Unfortunately, it has come to light that the Active Duration Fund has lost significant amounts of money,” wrote Mr. Conrad in his 19-line e-mail. “MDL overleveraged the account beyond the written agreement; instead of expecting it to make money in the current interest-rate market, the fund dropped. In sum, the entire value of MDL’s portfolio is down approximately $225 million on a total investment of $350 million.”

Mr. Taft would not talk to The Blade yesterday and did not have any public appearances where reporters could ask him questions.
Mark Rickel, the governor’s press secretary, said Mr. Taft did not see Mr. Conrad’s e-mail, was not told about it by Mr. Samuel, and Mr. Conrad did not talk to the governor about it.

House Minority Leader Chris Redfern (D., Catawba Island) said he did not believe Mr. Rickel and referred to Mr. Taft hiding “in a bunker.”

“Someone in the governor’s office has a loose interpretation of what the truth is. I can’t believe for a moment that no one told the governor,” Mr. Redfern said.

It is the second time that Mr. Taft’s staff has said he did not see a memo about the bureau’s investment scandal.

At a May 27 press conference, Mr. Taft said “neither Mr. Conrad nor any member of his staff ever informed me about the bureau’s investment in rare coins.”

Mr. Taft said he did not learn about the state’s failed investment in rare coins until he read The Blade’s April 3 story, which uncovered that the bureau had invested $50 million with Toledo-area coin dealer Tom Noe. He said bureau officials then told him the investment was “not only profitable, but safe.”

But in a March 18 memo, Mr. Conrad informed two Taft aides — chief of staff Jon Allison and Mr. Samuel — about The Blade inquiring about the investment contract with Mr. Noe’s Capital Coin.

In the 1½-page memo, Mr. Conrad wrote: “As a limited partner, BWC was not aware of some of Capital Coin’s business decisions.

Furthermore, there is little documentation or even proof to support the fact that Capital Coin did engage in illegal activities.”

Asked about that memo on May 27, Mr. Taft replied: “I don’t know what memo you’re referring to.”

Mr. Rickel said later that day that Mr. Allison and Mr. Samuel received that memo, but did not think it was important enough to put on the governor’s desk.

When the bureau believed The Blade would publish a story April 3, Mr. Samuel took the memo to the governor’s mansion, but Mr. Taft was in Ashtabula County for an event.

Mr. Taft returned to Columbus late on April 2. Mr. Allison was out of town, but he took the memo to the governor’s residence the following day, the same day The Blade published its first story about the rare-coin investment.

Family relations

As the scandal over the bureau’s investments deepened, the Ohio Ethics Commission and the inspector general’s office are examining what role George Forbes, a member of the bureau’s Oversight Commission, played in the state choosing MDL to manage part of the bureau’s portfolio.

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Mark D. Lay, chairman and chief executive of Pittsburgh-based MDL, confirmed that Mildred “Mimi” Forbes, the daughter of Mr. Forbes, has worked for his firm for about three years. She is a senior vice president on human resources and compliance issues, Mr. Lay said.
George Forbes said yesterday he will step down from the Oversight Commission.

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 would take civil or criminal action against the “appropriate parties.”

The bureau disclosed on Tuesday that Terrence Gasper, the bureau’s former chief financial officer, was forced to resign last year because of the losses.

Earlier this year, bureau officials told The Blade that Mr. Gasper left for health reasons. Mr. Gasper’s ethics statement for 2004 lists a “post-stroke gift” of lawn service work worth $550 from “BWC staff.”

Hired MDL in 1998

The bureau hired MDL in 1998 and invested $355 million in a long-bond fund with the firm. But in 2003, the bureau agreed to MDL’s proposal 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 active duration fund and another $125 million was added later.

But by September, 2004, the $225 million investment had no value. The bureau ordered MDL to close the fund and it recovered $9 million, the bureau said in a memo to Mr. Taft released on Tuesday.

Ohio House of Representatives members Steve Driehaus, left, Tyrone Yates, and Catherine Barrett discuss the failed investment controversy with state Sen. Mark Mallory in Cincinnati.
( THE BLADE/ALLAN DETRICH )

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Faxes about investments
Although some Oversight Commission members have said that they merely ratify decisions by the bureau staff, The Blade obtained separate Feb. 13, 1998, faxes to Mr. Forbes and fellow commission member Neal Schultz from Robert Cowman, then the bureau’s chief investment officer.

The faxes did not refer to MDL, but they provided Mr. Forbes and Mr. Schultz with a list of out-of-state firms that applied to manage investments under a new program called “emerging managers” — designed for minority-owned and small firms.

Mr. Cowman wrote that the firms probably would not get any of the $500 million from the bureau’s investment portfolio.

“Let me know if there are firms on this list you would like us to review,” wrote Mr. Cowman, who is now director of investment for the Ohio School Employees Retirement System. Between them, Mr. Forbes, an attorney, and Mr. Schultz, the Oversight Commission’s chairman who ran a window cleaning company and is now dead, picked 15 firms and nearly all received bureau funds to invest.

Although he is a Democrat, Mr. Forbes as president of Cleveland city council in the 1980s worked closely with then-Mayor George Voinovich, a Republican.

Mr. Voinovich, now a U.S. senator, appointed Mr. Forbes to the bureau’s Oversight Commission in 1995.

Paul Tipps, a former Ohio Democratic Party chairman and now a Statehouse lobbyist, worked with Mr. Forbes in 1988 to defeat a bill by a Toledo-area lawmaker to abolish the Ohio Turnpike Commission and turn the roadway over to the Ohio Department of Transportation.

“George is a dear friend and has been for years. The whole concept of minority brokers and emerging brokers is a phenomenal idea and it worked well, as long as they had the checks and balances in place. George was not in charge of checks and balances. Whoever changed them or influenced them, that is where the system fails,’’ Mr. Tipps said.

The lobbyist for MDL is Jerry Hammond, a Democrat and former Columbus city council president who has worked with Mr. Tipps. Mr. Hammond didn’t return messages.

Mr. Conrad announced his resignation May 27 after attorneys for Mr. Noe — the coin dealer and prominent Republican fund-raiser — disclosed that $10 million to $12 million was missing from the state’s rare-coin investment. Mr. Conrad could not be reached for comment yesterday.

Bush to appear in Ohio today

BLADE STAFF

COLUMBUS — President Bush is scheduled to speak
here today about the Patriot Act — the post-9/11 legislation that expanded the government’s investigative powers to battle terrorism.

The controversial act was passed overwhelmingly by
Congress in the wake of the Sept. 11, 2001, terrorist attacks.

It was enacted that October and is up for renewal
this year.

As Mr. Bush arrives, Democrats are expected to be
nearby to draw attention to the expanding investment scandal that includes missing rare coins and the loss of $215 million by a bureau of workers’ compensation
investment fund.

Mr. Bush has been lobbying to renew and strengthen the
Patriot Act that authorized increased powers for the FBI and other investigative agencies.

Congress could expand it, kill it, or reduce its scope. The law is set to expire in December.

Critics of the measure have said it violates certain guaranteed freedoms, including those against unfounded search and seizure by the government.

Supporters, such as Mr. Bush, say law-enforcement must have freer hands to stop domestic terrorism. He credits the act with breaking up active terrorist cells on U.S. soil.

No discipline planned

Mr. Allison, Mr Taft’s chief of staff, and Mr. Samuel, a former high-ranking bureau official, did not return messages seeking comment.
Mr. Rickel said Mr. Taft is “disappointed” that Mr. Samuel did not “share the information” with him or Mr. Allison.

But Mr. Taft has no plans to take disciplinary action against Mr. Samuel, Mr. Rickel said.

Instead, Mr. Taft said in a written statement that he plans to appoint a special liaison to the bureau, “who will keep me informed of day-to-day issues relating to BWC.…”

On Tuesday night, Mr. Rickel said Mr. Allison — based on a meeting with Mr. Conrad and Mr. Samuel — told Mr. Taft late last September that there was an investment loss at the bureau from $10 million to $20 million.

‘Dropped the ball’

Attorney General Jim Petro yesterday said the bureau “dropped the ball” last October when the agency asked the attorney general’s office to appoint a special counsel to “review the activities” of MDL.

“We had no knowledge of the depth or scope or magnitude of the problem; only that there was a problem and they would like a special counsel,” said Mr. Petro, a Republican who is running for governor.

Mr. Petro said he did not learn about the $215 million investment loss until Tuesday.

But Sen. Marc Dann, a Democrat from suburban Youngstown, said Mr. Petro had failed to react, just as he did not take prompt action after The Blade’s April 3 story about the state’s rare-coin investment.

“It is truly shocking to me that it is now over eight months and counting, and your office has not yet taken action to ensure the state recovers the over $200 million that was lost,” Mr. Dann wrote in a letter hand-delivered to Mr. Petro’s office.

Mr. Dann said Mr. Petro should immediately seek a court order for reimbursement of the lost $215 million.

The state also should seek an injunction to prevent MDL from destroying any records related to the failed $215 million investment and try to recover any security bonds available to the state for the “alleged neglience and mismanagement” of Mr. Gasper or other state employees, Mr. Dann said.

A timeline released by the bureau on Tuesday said the bureau asked the attorney general’s office on Oct. 8, 2004, to appoint special counsel to review the activities of MDL.

That Columbus law firm — Schottenstein, Zox, and Dunn — was retained on Nov. 2, 2004, and agreed with the bureau on March 28 to do a forensic audit.

“This is a firm with smart guys and lots of experience, and you’re telling me it took five months to figure out the money was gone,” said Mr. Dann.

“Petro has a huge gap. He knew the wheels were coming off the Noe investment. The Republicans aren’t interested in getting to the bottom of this. They’re interested in covering it up,” he added.

Mr. Petro said much of what Schottenstein, Zox, and Dunn did after being hired as special counsel is protected by “attorney-client privilege.”

“My perception is Schottenstein, Zox, and Dunn was very thorough in the matter,” he said.

Mr. Petro said litigation is “obviously on the radar screen,’’ and added that there could be multiple defendants.

Committee to review

Yesterday, Republican legislative leaders announced creation of a joint legislative committee to review the bureau’s investment practices.

The six-member committee would have four Republicans and two Democrats.

We are in the majority and if it’s not done right, there will be no willingness by the Democrats to accept responsibility,” said Senate President Bill Harris (R., Ashland). “If they blame us, we should be put in a position to be responsible.”

But Democratic legislators — outnumbered by wide margins in the House and Senate — called for a 16-member panel with an equal number of Democrats and Republicans.

Referring to Mr. Harris, Mr. Redfern said: “He can sit by himself and his three Republican friends and whistle in the wind. There will be no Democrats participating in anything less than a bipartisan commission.”

At a news conference yesterday in Cincinnati, Democratic legislators said a committee to examine the bureau’s investments must have subpoena power.

This is probably the tip of an iceberg of this type of conduct, not just in the BWC, but wherever these funds exist,” said Rep. Tyrone Yates (D., Cincinnati).

The $215 million investment loss accrued between February and September, 2004, two months before the presidential election, in which Democrat John Kerry conceded after determining that Ohio’s electoral college votes would go to President Bush.

“We find it very disturbing that this was not made known to the public at the time,’’ said Rep. Steve Driehaus (D., Cincinnati). “We want to know under whose order this was not made public.”

Blade Staff Writers Mike Wilkinson, Christopher Kirkpatrick, and Joshua Boak contributed to this report.

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

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