In e-mails, a timeline of pension system rift

LITTLE ROCK — On Feb. 15, one day after his bosses signed off on a $40 million investment managed by a Santa Monica, Calif.-based company, the head of the Arkansas Teacher Retirement System advised the firm’s senior managing partner, “Go make ATRS some money. I look forward to seeing the harvest!”

In an e-mail, system Executive Director George Hopkins told Michael Tennenbaum, senior managing partner of Tennenbaum Capital Partners, “I have a blue pen ready to sign the papers once I have them on my desk this morning.” Less than two hours later, he told Tennenbaum in another email that he had signed the papers.

The excitement of that day soon was overshadowed by a behind-the-scenes conflict over procedures used in investing millions of dollars on which future retirees depend, a conflict evident in documents obtained by the Arkansas Democrat-Gazette under the state Freedom of Information Act.

Nine days after those e-mails to Tennenbaum, Hopkins fired senior investment analyst Susan Crosby of Little Rock.

She subsequently told the system’s trustees in a letter that Hopkins spearheaded a “misrepresentation” of the $40 million deal.

Hopkins disputed her allegation.

He fired her, he said, for insubordination - she told an employee to disobey his instructions about how to describe Crosby’s title on the system’s website.

Crosby started work for the system Dec. 29, 2009, and was fired Feb. 24, system records show. Her annual salary was $94,365. Hopkins’ annual salary is $159,961.

TALE OF THE E-MAIL

Two days after the trustees OK’d the investment, a hint of disagreement appeared in an e-mail from Crosby to Hopkins. It said he “must have gleaned compelling information regarding Tennenbaum Opportunities Fund VI” in a meeting he had with Tennenbaum months earlier.

Neither retirement system private equity director Leslie Ward “nor myself felt that this investment opportunity met the general criteria employed by ATRS staff as we strive to meet our fiduciary responsibilities” to the system, Crosby wrote.

Ward could not be reached for comment at her office Thursday and Friday.

Crosby wrote that she recalled that Hopkins decided to ask system private equity consultant Michael Bacine of Franklin Park Associates to review the possible investment and Bacine “rejected” Tennenbaum Fund VI as not being “a plausible opportunity.”

System investment consultant group Hewitt Ennis Knupp was then employed to review the fund after Franklin Park was unable to rush through further due diligence on the system’s behalf, Crosby said.

“On a preliminary level, the Fund VI was presented to the board of trustees for approval pending further ‘due diligence’ as an ‘alternative’ investment, although it will be in the ‘private equity’ portfolio, right?” said her email.

On Feb. 7, a memo from the system’s staff to the investment committee said an investment of up to $40 million for the fund was recommended as an “alternative investment subject to final due diligence.”

When the trustees approved the investment, their resolution declared a need to immediately enter into a private equity ownership agreement in a move that Crosby said benefited Tennenbaum rather than the system.

Crosby told Hopkins: “I must say, the ‘rush rush’ on this investment approval, funding, etc., is a concern to me as one can never be so diligent when making $40 million investment decisions on behalf of thousands and thousands of ATRS members.”

“I want to make sure I understand this situation as I have not been involved since the original meeting with Mr. Tennenbaum. You are quite the savvy investor, Ghop - please let me know the information you had - would love to understand what I missed.”

Ghop is how Hopkins ends his e-mails.

In response, Hopkins told Crosby that he was “a little confused by your e-mail. I do not agree with some of the representations made.” Hewitt Ennis Knupp (HEK) made “a very thorough diligence review ... over a long period of time,” his e-mail said.

“You should feel free to read the HEK recommendation as [to] the quality of the investment,” said Hopkins, an attorney and former state senator.

“One thing I have learned from working with consultants is that often my feelings on an investment is not affirmed by the consultants,” he wrote. “It helps keep me humble and lets me realize that my opinion is often one of many.”

In response to Crosby’s allegation, Wayne Greathouse, director of public markets for the system, told Hopkins in an e-mail that “I am confused and disagree with Susan’s e-mail, as you and I both repeatedly instructed Hewitt Ennis Knupp to do a complete and independent due diligence process on the Tennenbaum investment and to give the board of trustees an independent recommendation in a fiduciary manner.”

Crosby later told Hopkins in e-mails that she “is happy to clarify any on my points to clear your confusion if you wish,” and that she had “a very informative discussion with PJ [Kelly of Hewitt Ennis Knupp] ...”

Hopkins told Crosby in an e-mail, “That is great. Ghop.”

CONSULTANT CONTRACTS

The $40 million is a small piece of the system’s investments, which are valued at $11.6 billion, including $770 million in private equity and $354 million in “alternative” investments like timberland, according to Hopkins.

Chicago-based Hewitt Ennis Knupp has worked as the general investment consultant for the system since 2001 and real estate investment consultant since 2008, while Bala Cynwyd, Pa.-based Franklin Park has worked as the private equity investment consultant since 2007, according to Hopkins.

Hewitt Ennis Knupp is to be paid $715,000 as the general investment consultant and $390,000 as the real estate investment consultant this fiscal year, he said. Franklin Park is expected to be paid $950,000 under its contract this fiscal year, he said.

Hopkins said the Tennenbaum investment isn’t the first time Hewitt Ennis Knupp has performed the due diligence on a private equity investment during the time the system has contracted with both firms. Franklin Park deferred to Hewitt Ennis Knupp on a fund similar to Tennenbaum’s. That was Capital Point Partners, but the firm chose not to recommend that investment, he said.

Tennenbaum is “an ‘opportunistic debt fund’” and Hewitt Ennis Knupp has “a greater concentration on opportunistic debt funds ... than Franklin Park,” Hopkins said.

System records show Tennenbaum met with Hopkins and his staff in Little Rock on July 27, after Hopkins told Tennenbaum that Franklin Park “had very positive things to say about your firm. ... That is a very good sign for you since it takes a lot to impress them. You must be doing several things right.”

A day after their meeting, Hopkins told Tennenbaum that he hoped the new fund “can be a good fit with the ATRS structure” and he plans to give Franklin Park “my positive impression about your fund.”

In an Aug. 9 memo to the investment committee, Franklin Park officials said Tennenbaum wouldn’t be actively involved in the fund’s day-to-day management, the fund may not be appropriate for a private debt portfolio, and the performance had been “mixed.”

In a subsequent letter to Hopkins, Tennenbaum said Franklin Park’s Aug. 9 memo “inaccurately characterize our firm and our funds,” and his engagement in the fund, the fund’s risk/return characteristics, and the performance of the firm’s recent funds.

Crosby said it was improper for Hopkins to give a copy of Franklin Park’s report to Tennenbaum and it shows that he was trying to help Tennenbaum obtain an investment from the system.

Asked to respond to Crosby’s remarks, Hopkins replied that, “This issue will be before the ATRS board on April 4. The ATRS board will hear my response to that question at that time.”

‘DUE DILIGENCE’

Michael Bacine of Franklin Park told Ward, of the retirement system, in a Jan. 25 email that it was agreed that the system “would pass on the opportunity and ... Tennenbaum VI was removed from ATRS private equity deal log” on an Aug. 10 call with Hopkins, Crosby and Ward.

“I then heard nothing about the fund until Dec. 17, more than four months after our call in August,” he wrote. “On that day, I spoke with George, who alerted me to the fact that conversations and meetings had been ongoing since August between [Hewitt Ennis Knupp], ATRS and Tennenbaum.

He said that Hopkins also advised him that Tennenbaum disagreed with Franklin Park’s August memo and Hewitt Ennis Knupp’s private equity team “was more favorable on the fund and was open to reviewing & recommending the opportunity to ATRS.”

“I then heard nothing about the fund until Jan. 19, 2011, when George called me to ask if [Franklin Park] could recommend Tennenbaum VI at the Feb. 7 ... meeting,” Bacine wrote. “I responded by stating that [Franklin Park] is open to updating our prior analysis ... but we could not complete our work in time for the upcoming board meeting.”

Asked to respond to Bacine’s comments, Hopkins said the board of trustees “will hear the issue” during its April 4 meeting.

“That is where it should be first reviewed,” he said. “In deference to the right of the ATRS board to conduct its own inquiry, I think it is best not to comment on any e-mail by Mr. Bacine that was sent to one ATRS staff member.”

After seeing the board’s Investment Committee agenda included Tennenbaum Capital Partners, Crosby on Jan. 27 asked Hopkins and Kelly, “Is this the same Tennenbaum Capital fund that George, Leslie and I met over the summer and Franklin Park reviewed and could not recommend due to several concerns?”

Nine minutes later, Hopkins sent an e-mail to Kelly: “PJ: I am no[t] seeking her input on this. If I want more information on this from Susan, I will ask for it.”

Before the trustees approved the investment, Hewitt Ennis Knupp sent its final report on Tennenbaum to system officials recommending the system commit $40 million to Tennenbaum Opportunities Fund VI “based on our due diligence.”

The fund “will accumulate debt securities that are trading at a steep discount to par or provide rescue financing as well as acquire deeply discounted distressed securities and commercial loans in the secondary market and arrange and fund direct capital infusions into distressed companies,” according to Hewitt Ennis Knupp.

Tennenbaum Capital Partners is seeking $1 billion in capital commitments and intends to make 30 to 40 investments with about $20 million to $50 million invested per transaction, Hewitt Ennis Knupp said.

On the day before the meeting at which the trustees approved the investment, Hopkins told Heather Christopher of Hewitt Ennis Knupp, “As to Tennenbaum, I plan to go fast on it, too. I plan to tell the board that all due diligence is complete and need the final resolution. If HEK cannot get on [the conference call] at all, I do not expect any issue. I have to beat the Capitol by 9:30, so this has to be very short.”

CONSULTANT CONTRACTS

In a March 7 letter to the trustees, Crosby said she sent Hopkins an e-mail to document that she was not involved in the investment recommendation and was subsequently terminated with no grounds provided.

In response to Crosby’s letter accusing him of misleading the trustees, Hopkins told the trustees, “Without specifically addressing each and every detail, her e-mail and letter are inaccurate, unsupported by the facts, exaggerations of any potential facts, and for the most part, totally untrue. ... Her termination ABSOLUTELY had nothing to do with the Tennenbaum investment.”

Kelly told the trustees in a letter responding to Crosby’s allegations that Tennenbaum and members of the system’s staff “had the sense that the characterizations and assessments made by Franklin Park did not demonstrate a thorough understanding of this investment” after Franklin Park’s preliminary assessment following a meeting with the system staff last summer.

“Franklin Park tends to prefer ‘pure’ private equity strategies (buyout and venture) that are more traditional in nature and have the highest expected return, but may also possess higher levels of risk,” Kelly wrote.

Kelly said Hewitt Ennis Knupp provided “a favorable opinion” on the Tennenbaum investment “with the caveat that the investment should be housed within the private equity portfolio and would not consume assets allocated to liquid alternatives.”

The firm asked the system and Franklin Park to provide a list of concerns regarding Tennenbaum and “we found that those concerns were either not well founded or were understandable and customary given the nature of the investment and were addressed in the Hewitt Ennis Knupp due-diligence report on Tennenbaum,” he said.

Kelly said he explained the due-diligence process and why the investment was placed in the private equity portfolio over the phone to Crosby, who thanked him and “voiced [her] comfort level with Tennenbaum.”

“As a firm, we have a strong belief that no stone should be left unturned when searching for investments to improve performance and ATRS’ ability to pay benefits,” he wrote in his letter to the trustees.

Crosby, who previously worked as a group acquisition specialist for the Variable Annuity Life Insurance Co. and as an investment research liaison for Stephens Inc., said in an interview that she never said she was comfortable with the Tennenbaum investment and “that’s a lie” to suggest that she did so.

She said she considers the investment a mistake for the system.

“My analysis of the opportunity left me with the impression that other investment opportunities were more attractive with less risk and unknown variables than Tennenbaum,” Crosby said.