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NC Pension Money Given to Tillis PAC Financier in 2013, Not Disclosed on State Treasury Report

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I’ve written in the past about the seemingly cozy relationship between NC House Speaker Thom Tillis and NC Treasurer Janet Cowell. In addition to personal endorsements of the Treasurer, Tillis not only oversaw legislation requested by Cowell, he voted to ensure its passage. The state legislation increased the percentage of NC pension money that Cowell is able to dedicate to investments in “alternatives,” which often entails entrusting funds to private money managers who are removed from public reporting requirements. An example of such a money manager is Crow Holdings Capital Partners LLC, a company whose owners have given vast amounts of money to Tillis-supporting super PACs this year.

Crow Holdings, a management group for at least 6 private hedge funds investing in real estate, is owned by Harlan Crow, an heir to the Trammell Crow estate of Dallas, TX. Millions in corporate donations to federal super PACs, including the Pro-Romney Super PAC “Restore our Future” and Karl Rove’s “American Crossroads,” as well as financial ties to Justice Clarence Thomas, have branded Harlan Crow as a Republican financier. But Crow has also contributed to the campaigns of Democrats, including North Carolina’s most recent treasurers, Richard Moore and Janet Cowell.

Harlan Crow has been the Subject of NC Pension Pay-to-Play Accusations in the Past

A 2007 article from the Charlotte Observer exposed a potential pay-to-play relationship between Harlan Crow and NC’s then-treasurer Richard Moore. From the article:

“When North Carolina’s State Treasurer Richard Moore met with Harlan Crow in October 2005, a lot of money was at stake. Moore was prepared to hire Crow’s Dallas-based investment firm to manage up to $100 million in state pension dollars, but first he wanted to meet the chief executive. The chat went well, and Crow Holdings got the investment.”

Crow Holdings had received two commitments from NC’s pension fund by 2006: Crow’s Fund IV receiving a commitment of $80 million and Fund IV-A receiving a commitment of $20 million. Note that the term “commitment” denotes a maximum amount that a fund’s manager (Crow Holdings, in this case) may call upon, but does not necessarily mean that said manager has or will call upon the entire commitment amount.

More from the Observer article:

“Less than a year later, Crow and six others tied to the firm gave $28,000 to Moore’s campaign on the same day.”

According to management fee documents obtained from the Treasurer’s office during a State Employees Association (SEA-NC) forensic investigation of the Teachers’ and State Employees’ pension fund, Crow Holdings received $384,339 in management fees from NC’s pension during the 2006/2007 fiscal year. The relationship was not shown on NC Treasurer’s report to the public covering the 2006/2007 fiscal year, but Moore’s report of fy2007/2008 shows the market value of NC pension money managed by the two funds at $67.6 million. Crow Holdings received an additional $238,852 in management fees from NC’s pension during the 2007/2008 fiscal year.

During the 2008 election cycle, NC’s now-treasurer Janet Cowell received maximum contributions from Crow family members Harlan, Katherine, Shirley, Margaret D., and Trammell S. Crow, as well as from Trammell Crow Company, totaling $24,000.

During the 4th quarter of 2008, Crow Holdings called upon additional NC pension money through a new fund (Fund V), which is indicated by the initiation of new management fees during that quarter. Fund V received a commitment of $100 million from NC pensions, bringing the total to $200 million between 3 commitments from NC pension to Crow Holdings. Crow Holdings received $376,707 in management fees from NC pension for the three funds during the 2008/2009 fiscal year, with $131,428 of that derived from the management of Fund V. The new Fund V relationship was documented within Treasurer Cowell’s report to the public for that year (FY 2008/2009 page 62).

From 2008 through 2012, Crow Holdings managed NC funds from only the 3 established commitments (IV, IV-A, and V), according to management fee documents.

The contributions from the Crow family to NC treasurers ceased with the 2010 introduction of an SEC rule declaring that an advisory firm is prohibited from managing funds from a public retirement account if the firm’s associates have provided financial contributions to the public fund’s controllers during the 2 years prior.

Treasurer Cowell Reaches “Alternatives” Limit – Requests Legislative Action

North Carolina’s retirement system, a $91 billion fund, is ranked the 13th largest pension account in the United States. North Carolina remains one of only 4 states still operating as a sole fiduciary system, with State Treasurer Janet Cowell functioning as the fund’s trustee. This means that Cowell is the sole authority over the fund’s investment decisions, without hindrance from an outside approval process. There are very few people in this world who can make the claim that they exercise unilateral control over $91 billion belonging to the taxpayers. This makes Janet Cowell a very important person in a world of countless fund managers eager to invest on behalf of North Carolina future pensioners, in return receiving on average 1-2% management fees and further profits in the range of 20% off of any gains.

Over the last several years, the NC Treasurer’s office has experimented with increasing use of private hedge fund managers to oversee North Carolina’s pension assets. Private hedge funds and real estate investments are considered alternatives, a term which denotes a classification for investments outside of traditional assets such as publicly traded stocks and bonds. On top of colossal (often hidden) fees, the alternative investments come with much higher risks to an investor. As a protective measure, North Carolina General Statutes restrict how much of our state’s retirement accounts may be invested in alternatives and, according to a 2010 report from North Carolina Auditor Beth Wood, that cap has been exceeded by Treasurer Cowell on multiple occasions.

Despite a prior statute change meant to bring the percentage invested in alternatives down to the legal limit by removing the “alternatives” designation from some categories of investments, Cowell soon, again, exceeded her maximum allotment of 5% in certain alternatives categories. The Treasurer’s office provided its response to the notice of statute violation, noting that fulfilling pre-existing fund commitments requires the Treasurer to continue to dedicate assets to alternatives investments, and stating that the office will seek another statute change to permit greater “flexibility” relating to the Treasurer’s alternatives allotment. Despite having voted against the previous reclassification of some alternatives, House Speaker Thom Tillis oversaw the passage of the requested alternatives-expansion legislation in 2011.

The Treasurer’s audit response also communicated that their office has taken effort to fix the overage by “prudently redeeming” certain investments in alternatives, and that they would continue to do so; however, by 2013, Treasurer Cowell made an additional $85 million commitment to a new hedge fund established by Harlan Crow’s real estate investment group (Fund VI). (Side Note: the minutes of a Jan. 2013 New Mexico Education Retirement Board Committee meeting show that Harlan Crow, while presenting his request for an investment in the new Fund VI, communicated that a previous fund in which North Carolina is invested, Fund IV, had a projected gross return rate of 4%. “Gross” often means prior to fees!)

Management fee documents obtained by SEA-NC show that $531,250 in fees were paid on the new Crow Fund VI during the first and second quarters of 2013. Though the market value for the amount called upon by Crow’s Fund VI should have appeared on North Carolina’s 2012/2013 Annual Investment Report, which states that it covers “investment advisors and fund relationships as of June 30, 2013,” NC’s investment in Fund VI was not disclosed within the report.

The same year, Cowell requested the passage of legislation to further increase the allotment for alternatives investments. After breezing through the Senate, public concerns were raised and it appeared that the legislation would face some opposition on the House side. House Speaker Thom Tillis oversaw the introduction of the legislation, this time voting in favor of the bill to ensure its passage.

Since then, the Crow family has given large contributions to federal Super PACs supporting the candidacy of Thom Tillis for US Senate. On December 31, 2013, Harlan and Margaret Crow contributed a combined $31,200 to the federal super PAC “Friends for an American Majority.” Started by wealthy hedge fund manager Paul Singer, the PAC supports four US Senate candidates, including Thom Tillis. Two weeks later, relatives Howard and Katherine Crow contributed an additional $31,200 to the super PAC. Tillis has attended fundraising events held by the Friends for an American Majority group in Colorado and New York.

In May of this year, Harlan Crow contributed $100,000 to the John Bolton Super PAC. In a press release dated July 23, 2014 the Super PAC announced that it had given a maximum contribution of $10,000 to the campaign of Thom Tillis. Two days later, the PAC received a $45,000 contribution from Trammell S. Crow of Crow Holdings.  By early August, the John Bolton Super PAC announced that they would “target NC Senate race,” along with New Hampshire and Arkansas, with additional independent expenditures.

While the Crow contributions and the PACs’ support for Thom Tillis may be chalked up to sheer coincidence, what is irrefutable is the fact that, prior to the contributions, Tillis advanced legislation from which Crow Holdings stands to benefit.

Steeped in Secrecy: Crow’s Management of NC Pensions Funds

As a real estate hedge fund, Crow Holdings Capital places Crow family funds into a pool with funds from its clients. That pool of money is then used for projects such as the purchase of property for a retail or office development, a hotel establishment, a housing complex to be renovated, etc. Operating private funds means that Crow Holdings is not subject to the public disclosure reporting requirements of publicly traded companies. The investments that Crow makes on behalf of North Carolina are further protected as a “trade secret” under North Carolina’s current laws, which do not require the disclosure. This means that once Crow Holdings takes possession of funding from North Carolina pension, what is done with the money from there is unknown to anybody outside of the offices of Crow and Cowell.

Even North Carolina’s Auditor appears to be shut out from access to information about where North Carolina’s money lies. Former SEC attorney Edward Siedle, on page 43 of his forensic investigation report of the Teachers’ and State Employees’ pension fund, recounts an exchange that he had with the Auditor’s office. During the exchange, Siedle asks why the State’s annual financial report does not account for heightened risk from pension funds in the possession of custodians outside of the Bank of New York Mellon, and thereby not subject to United States market regulations. Siedle quotes the Auditor’s office as stating, “only the Treasurer knows which assets are at Bank of New York and which are not.”

Future Pensioners Given No Choice, Limited Disclosure

I recently read about Crow Holdings Capital’s fight against the “taxpayer-owned hotel.” In 2009, the city of Dallas intended to begin selling bonds as a means of obtaining funding for the construction of a new convention center. Crow Holdings launched an opposition campaign and asked that the proposal be brought to a vote of the public. One can’t help but note the irony in the fact that while one Crow Holdings executive argued that public resources should not be placed on the line for funding a risky real estate venture without allowing the taxpayers a voice in the matter, Crow Holdings Capital was doing exactly that with funds from North Carolina’s pension account.

Not only were the taxpayers of North Carolina, contributors to the state pension account, given no vote in Crow’s investments – they are kept completely in the dark about which private developments the money is funding. Perhaps North Carolina’s pension fund is invested in a hotel owned by Crow Holdings Capital, located just down the street from the proposed “taxpayer-owned” hotel. Or, perhaps NC pension funding has assisted Crow in the acquisition of development property off of I-77 here in North Carolina. That information remains among North Carolina’s most expensive and best-kept secrets.

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