THE TRUTH ABOUT THE BANK OF NEW YORK SETTLEMENT FIASCO
OR
HOW TREASURER LOFTIS GOT OUT-FOXED BY WALL STREET
By
Thomas M. Parkman
State Retiree
The State Ethics laws of South Carolina clearly state:
“No public official, public member, or public employee may knowingly use his official office, membership, or employment to obtain an economic interest for himself, a family
member, an individual with whom he is associated, or a business with which he is associated.”
“No public official, public member, or public employee may make, participate in making,
or in any way attempt to use his office, membership, or employment to influence a governmental decision in which he, a family member, an individual with whom he is associated, or a business with which he is associated has an economic interest.”
The State Treasurer, Curtis M. Loftis, Jr. has violated the ethics laws by using his office
to gain an economic interest for a personal friend. He retained Michael H. Montgomery,
Esq. as additional counsel in a multi-million dollar lawsuit he filed on behalf of the State
against the Bank of New York Mellon. Mr. Montgomery is a personal friend, personal
attorney and associate of Mr. Loftis of long years standing. Further, Mr. Loftis, manipulated the terms of compensation, and created a fraudulent inflation of the valuation of
the settlement of the lawsuit and deprived the state of over $3 million which would have
gone into the State Retirement Fund in the doing of it.
An understanding of the history of the conflicted relationship between the Retirement
System Investment Commission and the State Treasurer is crucial to understanding of
important aspects of this case. As the Senate Finance Committee Subcommittee investigating the situation correctly reported, if in understatement, “the relationship between
the State Treasurer and the RSIC was and remains dysfunctional.”
Part of the problem may lie in the fact that the appointed members of the Commission
must be experienced professional people of proven capacity with advanced degrees
and training in either economics, accounting, finance, business, banking and investing
or other areas germane to the work of managing the $28 billion in the SC Retirement
Trust Fund. The State Treasurer, as an ex officio voting member, need not, by law,
have such qualifications. Mr. Loftis has no level of training, experience or education
comparable to that of other members of the Commission. Prior to election to the office
of Treasurer, he had never held elective office, owned a pest extermination firm and invested in real estate. Were it not for the fact that he is state Treasurer, Mr. Loftis would
not be qualified to sit on that Commission.
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Further, Mr. Loftis could have little experience or understanding of the culture of the
world of High Finance. It is a world of great wealth that revolves around sums of money
so vast as to almost defy ordinary comprehension. It is an unstable world of constant
flux and change in which vast sums of money can be made or just as easily lost. The
Bank of New York, for instance, has assets of $23 trillion. The SC account in that bank
is approximately $40 billion. Investments are made in increments of at least $100 million. Fees for service are calculated in basis points (bsp). A bps is one one hundredth
of 1%. That is, 1/10,000 of a sum in question.
The issues facing the Investment Commission are complex and difficult. Their discussions and the language of those discussions must necessarily be highly technical. Their
decisions as well as the research and analysis on which those decisions are based
must, quite often, be extremely complicated. Is it any wonder then that under these
conditions there would be problems in communication or that Mr. Loftis would be suspicious of matters he simply did not understand?
In November, 2012 the Commission unanimously voted to approve a commitment to
invest in a private equity fund. On March of 2013, the Treasurer refused to release
funds for completion of that transaction. The Commission appealed the case to the Supreme Court. Just before the case was to be heard, Mr. Loftis released the funds. Had
such a ploy been successful he would have, in effect, gained a veto power and thus
control over the decisions of the Investment Commission. In the hearing before the Supreme Court, Justice Beatty said “We don’t appreciate trying to referee kids in a sandbox.” Control over the investments of a $28 billion trust fund is some sandbox. This
conflict gets to the heart of the conflict between the role of the Treasurer as a fiduciary of the Retirement Fund and that of custodian of state resources.
Another very serious situation came to a head on April 9, 2013, when Mr. Loftis’s staff
legal counsel filed a formal complaint with the Inspector General accusing the members
and staff of the Investment Commission of “…public corruption, securities fraud, violation of securities law, mail and wire fraud, common law fraud, ethics violations…” The
letter particularly singled out the Chairman of the Commission, Reynolds Williams. A
similar vendetta was carried out against Converse Chellis, then state treasurer, in the
2010 campaign. A recent AP news article described one such example: “Loftis won his
first political office in 2010 partly by criticizing then-Treasurer Converse Chellis for using
the college-savings program to promote himself at no cost to his campaign. In his own
TV ads, he called it an example of "exactly what's wrong with state government.” In the
year before the 2014 election, Mr. Loftis has done exactly the same thing himself. In a
comment typical of his methods, Mr. Loftis is quoted: “Given how much practice Converse has had filming TV ads using public funds, I’m not surprised that he filmed yet another ad behind his desk. I’m glad he’s able to show up to the office when it’s time to
film a television commercial and create the illusion that he actually works a full week.”
Over time, the various charges of corruption, fraud and abuse with the clear accusation
that members and staff were using the Retirement Fund for their own financial gain,
were investigated by SLED, the Attorney General’s Office, the Inspector General, the
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State Ethics Commission. Most recently, the Funston Advisory Services LLC completed
a Fiduciary Performance Audit on the Investment Commission and stated, the dysfunctional relationship between the commission and Loftis, a member of the agency’s board,
is “one of the most significant risks to the $27 billion portfolio” that benefits more than
550,000 public workers, retirees and their beneficiaries. No evidence of wrong-doing,
criminal or otherwise was found. In addition, two independent audits found no evidence
of corruption, wrong doing or misuse of funds. The Senate Finance Subcommittee investigating these matters has confirmed these findings. Mr. Loftis has, in effect, carried
out a vendetta of slander, defamation and character assassination which has not one
scintilla of foundation in fact.
At the same time these accusations were being made to the various state agencies, Mr.
Loftis was engaged in what one can only describe as a public, quasi-religious crusade
against the members and staff of the Investment Commission. In appearances on national television and other public appearances and media he portrayed the retirement
funds as being mismanaged and at risk. The cost of fees was deemed completely outrageous, the rate of return was portrayed as being inappropriately below that of other
states, and the Investment Commission was denounced as being sinful, corrupt, without
a moral core and in so many words called a pack of thieves.
Using the prestige of the State Treasurer’s Office, Mr. Loftis has misinformed other
writers and has managed to create what can only be described as a demagogic caricature of the actual situation. By this deliberate misrepresentation of a complex and highly
sophisticated investment program he has pandered to the suspicions and ignorance—
not to mention hatred and anger—of an electorate which has little if any understanding
of these matters. In portraying the Investment Commission and staff as corrupt, sinful
and lacking a moral core, he has presented himself as the apostle of transparency, truth
and honesty fighting against corruption, waste and sin. By doing so he has placed
himself in an unassailable political position with an electorate convinced of the righteousness of his cause.
A case in point is that through Loftis’s efforts the investment management fees and expenses have now become a matter of controversy and misunderstanding among the
public and the legislature. In his testimony before the Senate Finance Subcommittee,
he stated repeatedly under oath that these fees were $1.6 million per day. Calculated
on an annual basis, such a sum would be $584 million. The actual fees were $418 million for the year, a cost that Mr. Loftis has exaggerated by $166 million per year or
$450,000 per day. He has knowingly exaggerated those fees by 40%. According to a
fee study completed by HEK Consultants, on an asset class by asset class basis, the
Investment Commission fees are generally low.
Public pension plans across the country have had great difficulties in recent times. In
order to maintain the viability of the state pension plan the state legislature has mandated that the anticipated rate of return on the pension fund must average an annual rate
of return over 30 years of 7.5%.
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The Investment Commission has decided as an investment strategy to base their decisions on net rate of return and to buffer against the risk of loss through diversification.
Risk cannot be completely evaded, no matter what you do. In order to balance the
mandated rate of return and at the same time minimize risk, the Investment Commission has had to devise an extremely complex and sophisticated investment strategy.
Anyone who reads the 2012-13 Annual Report of the Commission would have to be
surprised and pleased at the enormity and depth of that diversification. That report lists
roughly 3000 different investments in virtually every area of investment activity. Not only is that diversification impressive because of its size and variety but because of its
quality as well. While one should expect some losses, the relative rarity of loss is clear
testimony to the level of thought, research and intellectual rigor, not to mention hard
work, which the Commission and staff have brought to their jobs.
Such a strategy is costly. In order to make more money and also buffer against loss,
you must pay for it. You must also be prepared to pay the people who have the training, experience and proven capacity to implement this strategy. Salaries must be competitive in a world market. The questions about the investment fees and strategy, the
comparisons and quotes of this rate in comparison to that miss the point. A comparison
with other pension plans is superficial and misleading.
The best is the enemy of the good. The only legitimate question is simply: Is the investment strategy and the structure of the investment portfolio doing what they were
designed to do? Once can always improve; the members and staff of the Investment
Commission are honestly doing so. The strategy is working. This past fiscal year there
was a net rate of return of 9.9%.
The personal attacks, the implications and indeed accusations of corruption and dishonesty have a direct negative effect on the security of the pension fund and indeed the
pensions on which so many thousands of retirees depend. The staff and members of
the Investment Commission are highly trained and in many cases they are experienced
professional people. As anybody can understand, their professional reputations are
their property. It is their means to earn a livelihood. When a public official of the level of
the State Treasurer attacks the integrity and honesty of members and staff of the Commission, he is, in effect attacking their ability to earn a living. It is absurd to expect people of the level of competence, experience and acumen we so seriously need to come
to work for a Commission which is under constant attack and the object of a McCarthyite witch hunt by the chief financial officer of the state.
As a result of Mr. Loftis’s bullying, the Chief Operations Officer, Darry Oliver, of the
Commission has resigned with an attendant write-up in the Wall Street Journal. This
kind of negative publicity is hardly the thing this state needs. At the meeting when the
Commission accepted this resignation, Mr. Loftis exhibited a fit of rage and was escorted from the room by two security officers. Such officers are now in attendance at all
subsequent meetings. Two members of the Investment Commission have resigned because of his disruptive public behavior and irrational personal attacks. When offered a
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position with the staff of the Investment Commission at a salary of $150,000 per year,
one candidate withdrew her application saying that under no circumstances would she
come to work for South Carolina.
Under these conditions, the strange Bank of New York Mellon (BNYM) lawsuit occurred.
BNYM has been the custodial bank of SC state funds for years. In addition, BNYM provided securities lending services. In 2000, a securities lending contract was signed by
the state with the BNYM. These investments were to be managed according to specific
investment controls and guidelines. In 2010, after consultation with outside legal counsel, the then State Treasurer, Converse Chellis concluded that there had been egregious violations of those contractual guidelines.
In September, 2008, the Lehman Brothers bankruptcy occurred creating a loss in the
securities lending program. As a result of those investments made outside the contractual guidelines, SC suffered losses in excess of $200 million. After months of research,
in June, 2010, a litigation retention agreement for special counsel was entered into by
the State Treasurer with the law firm of Willoughby and Hoefer. In September, 2010,
Treasurer Chellis and Mr. Willoughby met with attorneys for the BNYM to attempt to
reach a settlement on the violations identified in the securities lending program. After
the failure of those negotiations, on January 11, 2011, the last day Mr. Chellis held office, Mr. Willoughby filed a lawsuit against BNYM.
Then matters took a strange turn, indeed. On January 12, 2011 Curtis Loftis took office
as State Treasurer. On the same day Mr. Chellis received a telephone call from Mr.
Willoughby who indicated that State Treasurer Loftis had instructed him to immediately
withdraw the lawsuit from court. On January 20, 2011, Mr. Loftis wrote a letter to Attorney General Wilson asking that Michael Montgomery, Esq., be added as a co-counsel
in the case. On that same day, Wilson approved that request. An addendum to the litigation retention agreement was entered into by the State Treasurer adding the firm of
Montgomery Willard as co-counsel.
It is quite clear from his public statements that the State Treasurer wanted Michael
Montgomery, Esq. involved in the suit. It is obvious that the lawsuit, involving as it did a
claim of over $200 million in damages, presented a real potential for realizing millions of
dollars in compensation for legal services. In the end, Michael Montgomery got 22.5%
of all attorney fees, an amount of $2,006,000.00. One can certainly question whether
Mr. Montgomery’s services were really necessary at the cost of an additional
$2,006,000.00.
Michael Montgomery is an attorney licensed to practice law in SC. He has been a personal friend of Mr. Loftis since 1978. He has, by his own statement, been Mr. Loftis’s
personal attorney since 1986. He took part in Mr. Loftis’s wedding to his now divorced
wife. He has been associated with him in business; he is a member of the Board of Directors of a charity which Mr. Loftis founded and who is the Chairman of the Board. His
involvement in this highly lucrative lawsuit is in clear violation of the law.
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In normal legal practice, an attorney would not practice in an area outside his competence, competence being interpreted in two ways. The first, obviously, is the knowledge
and experience to handle the matter at hand; the second involves the burden of the
workload in the case. Obviously Mr. Willoughby had more than adequate knowledge
and experience to handle the legal aspects of the case. Mr. Willoughby had several
competent assistants from his firm. One was universally respected as very capable and
had been working with him since the beginning on the case. If the workload were such
that additional counsel were actually needed, he would have said so and had additional
counsel retained well before he filed the lawsuit.
One may view Mr. Loftis’s letter of January 20, 2011, to Attorney General Wilson in
which he states that Mr. Willoughby has requested the addition of Mr. Montgomery as
special counsel in the lawsuit with skepticism. It certainly seems Mr. Loftis was being
disingenuous when he reported that Mr. Willoughby had requested the services of Mr.
Montgomery. Mr. Willoughby never requested the assistance of Mr. Montgomery before
the case was filed, but now, what choice did he have? The lawsuit on which he had
spent months of time and considerable expense had been withdrawn. If the lawsuit
were to continue with his participation, he had to continue with Montgomery on the
case. Given the fact that that involvement necessarily meant the loss of substantial
sums of money if the litigation retention agreement were followed, one may doubt that
Mr. Willoughby viewed the new arrangement with complete satisfaction. If the State
Treasurer had simply wanted Montgomery added to the case a petition or memorandum
to the court could have been sent. That is done all the time. It is interesting to note that
in his letter to the Attorney General Mr. Loftis reported that the amount of the legal fees
that the state would owe, even with the addition of Mr. Montgomery, remained unchanged.
There is no mention in Mr. Loftis’s request to the Attorney General of Mr. Loftis’s prior
association with Mr. Montgomery. The Attorney General is quoted in an Associated
Press article by Jim Davenport that “Attorney General Alan Wilson said Loftis didn’t initially disclose details of his longtime relationship with lawyer Mike Montgomery.” The
mandate of the state Ethics Law is quite specific and quite clear. While Loftis may have
disclosed details of his relationship with Montgomery at some point in time, there is no
evidence that he disclosed the crucial information that Montgomery is an “individual with
whom he is associated” in the legal definition of the term. The Attorney General obviously accepted the word of a fellow Constitutional Officer and believed the information
he had received was correct. Had he known that Montgomery was, indisputably, “an
individual with whom he is associated” it is inconceivable that he would have approved
him as a co-counsel.
There is no mention that he and Mr. Montgomery were long personal friends, vacationed together, were business partners, fraternity brothers, on private nonprofit boards
together. There is no mention that Mr. Montgomery had been Mr. Loftis private attorney
since 1986. Is it possible there could have been an attempt to gloss over this? Given
the very clear mandate of the state’s Ethics Law, should not this information have been
made available in advance to the Attorney General? Had this information been made
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available to the Attorney General would he have advised Mr. Loftis that this relationship
was just a little too close? Would he have approved the addition of Mr. Montgomery if
he had known the extent of the long and close association of Mr. Loftis and Mr. Montgomery? When Wilson learned of them later, he signed off on Montgomery’s involvement because he believed it “wouldn’t affect taxpayers (same AP article).” The AP article states that Loftis said he had told Wilson of the relationship from the start.
On January 26, 2011, the State Treasurer re-filed the lawsuit against BNYM. There followed more months of legal activity, subpoenas, various motions and allegations. A
settlement was reached on March 14, 2013. The State Treasurer clearly violated the
law against using his office to influence a governmental decision in which an individual
with whom he is associated has an economic interest.
The central premise of the settlement is so bizarre, so absurd that were it not so serious
it would be ridiculous. While conducting a lawsuit for over $200 million in damages, the
State Treasurer was carrying on contract negotiations for the custody of the SC state
accounts with the same bank. In February, 2012, the State Treasurer invited proposals
for the banking contract for state accounts from various banks including the BNYM. In
an evaluation of these proposals, the BNYM tied for first place with another bank for
custodial services and placed fourth in the equities investment accounts contract. By no
later than June of that year, the State Treasurer was negotiating with the BNYM for both
contracts. It is quite clear from a close reading of the text of the settlement that the settlement of the lawsuit was contingent on the BNYM getting the contract for the custody
of the $40 billion SC account. In essence, the BNYM used the settlement of the lawsuit
to buy a 10 year contract with the state of SC. Whoever heard of tying a procurement
contract for banking services with the settlement of a lawsuit? From the point of view of
the BNYM, this can only mean that the lawsuit was not to be taken seriously. The original invitation for proposals included a 5 year contract. The settlement included a 10
year contract.
A careful analysis of the settlement with the BNYM clearly suggests that the State
Treasurer manipulated the terms of the settlement to gain greater compensation for his
personal attorney and friend. The final settlement involved cash payments of a total of
$34 million and non-cash benefits and reductions in other items alleged to be worth $44
million. Of the cash payments, $25 million was to go to the state and $9 million to go to
the attorneys. The non-cash benefits had a projected value of $44 million which was
accrued over 10 years. Based on a total settlement worth $78 million and attorney fees
calculated according to the original litigation retention agreement the total for the attorneys would have been slightly less than $9 million. However, the whole settlement and
the calculations of the legal fees based upon it are specious.
The calculations are based on non-cash benefits consisting almost entirely of fee reductions for services which, under present conditions, SC would never use. These reductions in service fees would require hedge funds with assets of at least $7 billion in aggregate to use the services of a HedgeMark dedicated managed account. The settlement clearly states “…that the Treasurer shall invest in the HedgeMark platform ser-
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vices for a period of 10 years…” It is only by using these services for 10 years that a
savings of $44 million could be realized. The settlement agreement also clearly states
that the Treasurer has full authority to make such an investment and such a commitment.
The Treasurer lied to the BNYM. The Treasurer has no such authority. The pension
trust fund is the property of the present and retired employees vested in the pension
plan. It is not the property of the state of SC. Only the Investment Commission could
make such a commitment to invest in such services. They would never do that for several reasons. The required sum of the assets of the hedge funds needed to get the reductions in fees exceeds the amount the Investment Commission would be prepared to
commit to such a specific area of investment. This is totally contrary to the fundamental
principle of controlling risk through diversification. Further, technical analysis indicates
that the HedgeMark platform does not meet the criteria necessary for investment. It is
an attenuated platform, that is, the funds it has under management are not sufficiently
large to merit investing in it. Finally, even if the Investment Commission would be willing to invest in it, each of the managers of the hedge funds into which SC has invested
would have to approve it. They would not for the same technical reasons. Moreover,
the Investment Commission already has an arrangement with another platform service
that is entirely satisfactory.
In his testimony before the Senate Finance Subcommittee, the Treasurer stated—
falsely and under oath—that Hershel Harper, the chief investment officer, was favorable
at the time to the HedgeMark platform. He most certainly was not. Such a statement
indicates the Treasurer’s professional incompetence. No due diligence had been done
at the time. The Commission had made no evaluation or decision on such a question.
The Commission had not even ordered such an evaluation nor had any reason to seriously consider the question. Mr. Loftis has repeatedly on national television called investing in hedge funds “highly risky.” He has severely criticized the Commission for investment in such funds. Stranger still, he would pay millions of dollars per year for the
services of a hedge fund platform owned by a bank that he has sued for losing the state
over $200 million.
A strange aspect of the settlement was the fact that the Treasurer signed the contract
with the BNYM for 10 years. The original procurement request was for a contract lasting 5 years. To understand why this change happened, one must understand the shell
game that was going on. The lawyers were to be paid $9 million. This matched closely
the amount to be awarded under the terms of the litigation retention agreement but ONLY if that sum were $78 million. In order to reach that sum, the non-cash benefits would
have to be $44 million. If the contract with the BNYM were only for 5 years the settlement would be short $22 million for their fee purposes. Calculated according to the
formula in the litigation retention agreement, if the settlement were $22 million short, the
attorneys would get $1.54 million less. Loftis and Montgomery carefully manipulated
the settlement to add another 5 years on the service contract agreement thus doubling
the value of the non-cash benefits.
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In letters of May 2, 2013, between the State Treasurer and the Attorney General, the
Litigation Retention Agreement was set aside. It is obvious from these letters that the
payment of the attorney fees by the bank of BNYM was agreed to in March/April of
2013, while the Litigation Retention Agreement was still in force. The attorneys agreed
to a payment of a negotiated sum by BNYM. Why was this done? Obviously the attorneys would never accept an arrangement which paid them less money. At the same
time, the Attorney General, by Loftis’ letter of May 2, 2013, was presented with a fait accompli. The settlement had been negotiated. BNYM would pay the attorneys $9 million
instead of the state. Nowhere in that letter was the Attorney General told the size of the
attorney fees or the total value of the settlement. The Attorney General accepted the
arrangement in the belief that, “…it wouldn’t cost the taxpayers any money.” He was
wrong and he was misled again. The only way the attorneys could get more money
was if the state got less money.
The original litigation retention agreement was in force until the time of the actual settlement. Under its terms, all monies in the settlement would first come to the State. Attorneys costs and fees paid according to a formula common in state contracts of this
sort, would be verified and then paid by the State. By arranging a negotiated settlement
with payment of attorneys' fees directly by the BNYM, all the controls, the reporting and
verification required in state contracts of this nature would be evaded. If all of the money gotten in the settlement were paid to the state, the attorneys, following the formula in
the litigation agreement would be paid $5.52 million instead of $9 million. Curtis Loftis
bilked the state, of which he is Treasurer, of $3.47 million, $2.006 million went to an attorney who, by law, should never have been involved in the case in the first place. Michael Montgomery was Curtis Loftis’s closest personal legal adviser. He was present at
the time of the final negotiations of the settlement and he had a major role in the debacle that is the BNYM settlement. It should be noted that Mr. Willoughby, after two years
of effort, was not present at the final negotiations in March, 2013.
The retirement fund actually got not one dime out of that settlement. In his gullible ineptitude, Mr. Loftis simply did not seem to understand that the $25 million gained in the
settlement for the state would be paid into two collateral reinvestment accounts handled
by BNYM. These accounts maintain a cash reserve required for securities investment
collateral. At the time of the Lehman Brothers bankruptcy, which triggered the economic collapse of 2008, the BNYM sold its own assets in Lehman Brothers and during the
same time, in clear violation of the service contract with SC, used monies largely from
the SC pension trust fund to BUY assets in Lehman Brothers. They, in effect, in the
most outrageous aspect of this entire affair gambled with the SC pension fund money
and not the bank’s money and lost. These losses triggered a deficit in the SC securities
investment collateral accounts. Not only did $25 million go into those accounts but,
adding insult to injury the state must deposit an additional $50 million in the pension collateral account in order to cover the deficits created by the BNYM’s shoddy investments.
Curtis Loftis “settlement” with the BNYM did not even cover the deficits caused by the
BNYM’s gamble. Because of the settlement, the state cannot now turn to the courts for
relief in this matter.
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In addition, the hidden costs of this case have been enormous. The staff of the Investment Commission spent thousands of hours reviewing hundreds of thousands of pages
of documents. Commission managers, one commissioner, 8 staff members and a
number of other state employees were deposed.
In light of all the facts in this settlement, it is clear that the state of SC would have been
no worse off than if the state had taken the case to court and lost. Would the state have
lost? While nobody can predict the outcome of any legal proceeding, the facts of the
case are quite clear. The BNYM violated clear contractual investment guidelines and, in
a cynical gamble with SC pension fund money instead of their own money, lost over
$200 million. The case would be tried before a SC judge with a SC jury sitting in Columbia, SC. The primary rebuttal was an affidavit from Thomas Ravenel declaring that
he was aware, at the time he was State Treasurer, that the BNYM was violating those
guidelines. This puts in place the issue of statute of limitations. Other commissioners
have stated that they have no memory of such a matter. Thomas Ravenel served 6
months as state treasurer. He was arrested in June 2007 for cocaine use and distribution. He resigned in disgrace in July, 2007 and served 10 months in prison. That a cocaine addict would remember such an arcane detail listed in the no doubt extensive and
complex reports concerning a $30-40 billion banking and investment portfolio six years
after the event is certainly open to question. Any competent attorney cross examining
such a witness before a SC jury would have eviscerated the credibility of such a witness. Montgomery and Willoughby did not even have Ravenel, BNYM’s key witness,
deposed. They said that affidavit undermined the case.
The affidavit is an obvious concoction in direct contradiction to the most crucial facts of
the case. BNYM had a contract with the state in which the bank handled all the securities lending investment activities. In accordance with that contract they handled all the
details of those investment activities internally. They did not report those specific details
but simply provided monthly summaries of the account with statements of the earnings
of the securities lending portfolio. Only when massive losses occurred was Treasurer
Chellis able to realize that something was seriously amiss and began to take steps to
address the situation. Such losses could only occur where there had been massive violations of the contract. Under the terms of the contract, the staff member in the Treasurer’s Office responsible for reviewing these matters, received only summary reports in
accordance with the terms of the contract. Consequently, the data was not available in
the Treasurer’s Office for Mr. Ravenel to make the statements he does in his affidavit.
Further, BNYM in the summer of 2008 in a time of uncertainty and crisis in the financial
markets, sold its assets in Lehman Brothers and, using funds from the state pension
account, bought assets in Lehman Brothers during this same time frame. These specific violations of the contract and the damages arising from them occurred during that
Summer and Fall of 2008 well within the period of the statute of limitations and well after
Mr. Ravenel resigned. Further yet, there is the issue of SEC violations and security
fraud violations under the RICO Act. Damages triple in value if a violation of the RICO
act occurs. In addition, interest is levied at 8% from the time of the actual damage until
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the case is resolve. Such a case could easily take 5 to 7 years to be concluded. Moreover, there is the matter of attorney fees and punitive damages.
Curtis Loftis, in his feckless and pusillanimous rush to settlement, wrote off losses of between $100-200 million. If the state had gone to court and prevailed, given all the variables, the state could have realized sums of between $500 million and $1 billion. The
state of Florida went to court and recovered all its losses.
In agreeing to a 10 year contract with the BNYM he has placed the state bank account
in a bank that had violated contractual guidelines, lost $100-200 million in a gamble with
pension trust fund money, sold the state a bill of goods in the form of investing $7 billion
in a hedge fund platform so attenuated it could never be given serious consideration
and by a cheap trick funneled any settlement monies into an account that covers losses
incurred by that bank’s sorry investments.
The Investment Commission questioned Mr. Loftis twice in separate meetings about
specific details of the settlement especially attorney fees and total valuation of the settlement but were never told critical details of the settlement with the BNYM until the
January 2014 hearing of the Senate Finance Subcommittee. It is unclear that these details even existed before the Senate Finance Subcommittee hearing. In his testimony
before that same committee Mr. Loftis was asked about continuing to do business with
a bank which violates securities investment contracts. He offered the fatuous excuse
that “…everybody was doing it.” When asked about using another bank, he noted in a
puerile exculpation that it would be too difficult to move to another bank.
This case is a disgrace. Curtis Loftis does not know his shame for the shame that it is.
The only response that any honorable person could make under these circumstances to
the BNYM would be “what others do is irrelevant, you are not going to do this to South
Carolina. If you do, we are going to take you to a court of law where you will face a
South Carolina judge and a South Carolina jury. We don’t think they will be any more
impressed with you than we are. Regardless of the outcome of any lawsuit, we are going to take our business elsewhere. At least we will keep our self-respect.”
In his irresponsible folly, the State Treasurer signed a contract to do business with the
very sort of people who caused the collapse of 2008 in the first place. With what contempt must they, and indeed, the financial community at large, view Curtis Loftis and
South Carolina. Curtis Loftis has put the funds of South Carolina at risk. After all, what
is to prevent the BNYM from perpetrating the same or similar kind of squalid maneuver
at some time in the future? 10 years in the world of high finance is a long time. Are we
to have to lose another $100-200 million before we learn the hard way not to do business with BNYM? Truly, Curtis Loftis has sold our birthright for a mess of pottage.
As an exhibition of brazen mendacity, manipulation and simian incompetence, Mr. Loftis
handling of the BNYM affair could, I submit, hardly be surpassed. Matters are, however, even more insidious than that. The State Treasurer must be not only a person of
impeccable integrity above reproach, he must be a person above even the suspicion of
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reproach. Such is not the case with Curtis Loftis. His corrupt bungling has cost the
state millions if not tens of millions of dollars. He has slandered and maligned good and
loyal state employees to the point that they have been driven to resign. He has so severely damaged the reputation of SC in financial circles that it threatens to harm our
ability to do business in financial markets. He has caused potential candidates for employment whose expertise is greatly needed to flatly refuse to come to work for SC. His
self-serving publicity has misinformed misled and confused the public. His deficiencies
in ethical integrity, public decorum and professional competence have so undermined
his capacity for sound and honest judgment that his presence poses a continuous risk
to the reputation and economic interests of the state. These deficiencies have presented a clear pattern of corrupt practice which urgently needs to be addressed.
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