Corporate & Securities Law

Public Pension Funds Gamble With Risky Investments

By Mark Maddox

While private companies are gradually withdrawing from their addiction to risky investments, public pension funds have been slow to follow suit. Following the market?s downturn - which produced about $1 trillion in losses - state and local governments faced a Catch 22 situation: Slash retirement benefits or try to boost returns with high-risk investments.

As it turns out, the latter option is becoming the option of choice for more public pension funds.

?In effect, they?re going to Las Vegas,? said Frederick E. Rowe, a Dallas investor and the former chairman of the Texas Pension Review Board, in a March 8 article in the New York Times. ?Double up to catch up.?

Among the strategies public pension funds are gambling on with workers? retirement money: Commodity futures, junk bonds, foreign stocks, deeply discounted mortgage-backed securities and margin investing. Hedge funds, which were once cast aside as an investing strategy, are now gaining favor, as well.

Examples of public pension funds in crisis because of risky investments are not hard to find. Last month, the Atlanta firefighters? pension fund sued the custodian managing its plan, Chicago-based Northern Trust, accusing it of making several risky investments that could cost the fund millions of dollars.

The lawsuit claims that Northern Trust breached its contract and fiduciary duty with mortgage-backed securities investments - investments that ignored the warnings of the company?s chief economist. The Chicago Public School Teachers? Pension and Retirement Fund also joined lawsuit, which was filed Jan. 29 in a federal court in Chicago.

Investment giant Morgan Stanley also is the subject of a high-profile case involving pension funds and risky investing strategies. A December 2009 article in the New York Times first reported the story. According to the article, a Virgin Islands pension fund sued Morgan Stanley based on allegations it defrauded investors by marketing $1.2 billion of risky mortgage-related notes that it expected to fail.

The lawsuit, which was filed Dec. 24 in a Manhattan federal court, also accused Morgan Stanley of collaborating with the credit rating agencies Moody?s Investors Services and Standard & Poor?s to obtain AAA ratings for notes sold in 2007 as part of a collateralized debt obligation known as ?Libertas.?

Full post as published by Representing Investors on March 11, 2010 (boomark / email).