The Skorina Report: Risky Business–Chief Investment Officers and Public Pension Plans

SkorinaHappy August!

This is supposed to be the slow season in the media biz as torpid reporters and readers doze through late summer, but a story in the Wall Street Journal last week caught our eye.

The headline read: “Pennsylvania Attorney General Kathleen Kane Charged With Obstruction, Perjury.”

The story even got big play in London where the Daily Mail gave it a lot of ink with many pictures of Ms. Kane wearing a smart white-on-white outfit for her day in court.

Just another ho-hum episode of (alleged!) official misbehavior, and far removed from our investment-management beat you say?

Mais, non!  Ms. Kane is actually a peripheral figure in a story we’ve been following for many months, which highlights the political pressures on public plans and their professional investment staff.

Our protagonist is Anthony Clark, the recently-retired chief investment officer of the Pennsylvania SERS pension fund, so it lies squarely in our professional cross-hairs.

We write about the careers, compensation, and investment performance of chief investment officers and money managers (at both nonprofit and very-much-for-profit organizations), these being the people we work with in our day job as executive recruiters.

Commentators on U.S. public pension funds often lament that poor governance and political entanglements can hurt their investment performance.

The Tony Clark saga is a case in point.  It’s also a cautionary tale for investment pros working in or contemplating a move to a public pension.

First, we offer a short (or shortish) version.

For those who want the whole blow-by-blow chronology with links to sources (or who just have time on their hands) there is an addendum further below with our long version.

The education of Anthony Clark: A cautionary tale for CIOs and public pensions

Last week Pennsylvania Attorney General Kathleen Kane was charged with obstruction and perjury in a Montgomery County courtroom.

Six months ago the state’s Treasurer (and former aspirant to the Governor’s office) Robert “Rob” McCord, suddenly announced that he was pleading guilty to federal charges of campaign finance violations and resigned his office.

Two unremarkable bits of political malfeasance, one might think.  But both connect to the career of one public pension plan chief investment officer we know.

We think it’s a pretty interesting story.  You be the judge.

Mr. Clark goes to Harrisburg

I’ve spoken several times to Tony Clark since he took the SERS job and he always struck me as a well-credentialed and knowledgeable pro with a good grasp of the big-picture issues in institutional investing.

He is a certifiably smart guy with two engineering degrees from University of Virginia and an MBA from Wharton.  Among other jobs he spent 13 years as director of equities at the prestigious Howard Hughes Medical Institute in Maryland.

He was hired by the $26 billion SERS fund in April 2011 and his first two years were uneventful.  He even got a nice raise in his second year.  Then in early 2013 he and his chairman faced gratuitous attacks from a politically ambitious state treasurer.

Allegations suddenly popped up that he might have been involved in some wrongdoing.  Tony’s direct accuser was a junior SERS staff attorney unnamed in public documents.  But the charges were then publicly trumpeted by then-Treasurer McCord with an assist from Attorney General Kane.

The charges ultimately dissolved and both Mr. McCord’s and Ms. Kane’s political careers came crashing down for reasons unconnected to the Clark affair.  Then Mr. Clark’s accuser, we’ll refer to her as Ms. X, was transferred from her SERS job to a job at the state bureau of prisons.  But Tony Clark’s career at SERS was over.

Within days of the first public reports, both CIO Clark and Chairman Nick Maiale were out, with Mr. Clark resigning on Dec 31, 2013.

Tony Clark spent most of 2014 in professional limbo.  No actual civil or criminal charges were ever brought against him.

Nine long months later an independent investigation by a prominent Pennsylvania law firm found no evidence that Mr. Clark had done anything illegal, unethical, or immoral.  He was exonerated, but only after the damage to his reputation was done.

Lessons learned:

In our conversations with Tony, one theme he kept returning to was the potential abuse of so-called “development mandates.”

“Pension assets are not the property of the state, but of the plan participants.  They should not be used as a source of appropriations for state economic development.  To do so can create conflicts of interest since the state and pensioners have different objectives.”

At SERS, as at most public pensions, such in-state development schemes have been around forever and are well-publicized.

Twenty years ago in a SERS newsletter, Chairman Maiale and then-CIO Peter Gilbert proudly told the world that 6.6 percent of the SERS fund was invested in Pennsylvania; far above the 2.4 percent average in-state allocation among public pensions around the country.

Mr. Gilbert said: …”we have an ability to help the state while also helping the portfolio.”  But he cautioned that in-state investments must meet “the same level of due diligence and care and meet the same investment criteria” as any other investment.  “It is important to remember that by law our fund must be invested for the sole interest and exclusive benefit of SERS annuitants who are the beneficiaries of our plan.”

This is probably the suave, politically dexterous way pension leaders should handle this issue publicly.  The pensioners, whose money it is, can only hope that someone behind the scenes is actually doing severe due diligence on all such politically-charged proposals and killing at least the worst of them.

Their skills in this area might partly explain why Mr. Maiale lasted 22 years in his job and Mr. Gilbert lasted 15 years in his.

Scholars who have studied the question of political influence on public pensions note that, although state laws often stipulate that in-state-preferred investments must be judged on the same basis as any others, there is usually no effective enforcement mechanism.  The language is sometimes just a fig leaf to cover questionable investments.

We don’t think that Tony’s impatience with such petitioners led directly to his being pushed out.  But he suspects that it didn’t make him many friends and left him with scant political support when the merde impacted the ventilateur.

SERS was Tony’s first experience with a public board, and it may be that he came up a bit short on finesse.

Looking more broadly at the strictures he faced, Tony said:

“There is an inherent conflict when dealing with a public board.  Any CIO who achieves better-than-average performance over time has to do something different from the consensus.  That’s how superior returns are achieved.”

“But board members feel very uncomfortable deviating from the consensus.  They worry about headline and reputational risk.  So they hire consultants to tell them what the other funds are doing.  That’s what’s called “best practices,” i.e. the common wisdom and the safe choice.”

He summed up his time at SERS this way: “I’ll say this: career risk at public pensions with a highly political governance structure is too high.”

“What have I learned?  On the one hand, I would never have taken the job, if I knew what I know now.  On the other hand, I would not have known what I know now.  So there you go.”

The education of Anthony Clark: The not-so-short version

Nick Maiale was appointed SERS chairman in 1992, and served for 22 years through five governors, both Democrat and Republican.

It was he who hired SERS’ first chief investment officer, Peter Gilbert, in 1993.  Mr. Gilbert had a very successful 15-year run, earning many industry plaudits, then left to become the first CIO of the Lehigh University endowment.  SERS investment performance was above average among large public plans over this whole period.

John Winchester, who moved into the CIO position after Gilbert left, retired in January, 2011 and Mr. Maiale and his board then hired Anthony Clark, who took office in April, 2011.

The board was satisfied enough with Mr. Clark’s performance in his first two years to vote him a modest eight percent pay-hike: from $240K to $260K.  That comp was right in line with his peers running similar-sized public funds, and, given the lack of any incentive bonus, perhaps a little on the low side.

The first surprise came when the state Treasurer, Robert “Rob” McCord held a press conference in January, 2013, to denounce Mr. Clark and, by implication, Mr. Maiale and his board majority, for that pay-raise.  His objections weren’t very intelligible, but amounted to the assertion that it was “bad optics.” Speaking of optics, you can enjoy a video clip of that performance.

Mr. McCord had just been re-elected to a second term as Treasurer, and as such he was an ex-officio board member of both SERS and its bigger sister fund PSERS.  His re-election as Treasurer also marked the beginning of his campaign for governor.  His public spanking of Tony Clark and the Maiale-chaired SERS board looked very much like a way to raise his profile as a staunch friend of public employees and advocate of thrift in government.

Mr. McCord had parachuted into politics from the private sector.  He’d earned an econ degree from Harvard and (like Mr. Clark) an MBA from Wharton, then became wealthy as a venture capitalist before he ran for Treasurer in 2008.

Three months later Ms. X, a junior staff lawyer at SERS (who had arrived shortly after Mr. Clark in 2011), wrote an e-mail directly to board member Oliver Mitchell.  She alleged that Mr. Clark had misled the board about the performance of a $250 million stake in a hedge fund called Tiger Management.  That investment was in the process of going sour (a Tiger employee had taken an unlucky position in gold).

The staff lawyer (whose name was consistently redacted from all public documents) also reported her suspicions to her boss, SERS’ long-time Chief Counsel Sam Yun.  What action, if any, was taken by Mr. Yun, is not known.

In June Mr. Yun retired and Victoria Page-Wooten was assigned to SERS as the new acting Chief Counsel.  Ms. X brought still more concerns to her new boss.  She now said that some staffers thought that Mr. Clark might be day-trading for his own account on company time, possibly using inside SERS information, which might be a violation of SEC rules.  Again, there is no indication in public records as to what action, if any, was taken by Ms. Page-Wooten.

Finally, in October, Ms. X reached out to people in the main office of the OGC (which reports directly to the governor), and a parley of lawyers, excluding the SERS Chief Counsel, decided that the day-trading allegation might require a formal notification to the SEC.

They hired an outside law firm to study the matter.  This triggered the cascade of events which led to the resignations of both Chairman Maiale and CIO Clark.

In our conversations with Tony, he had no explanation for the staff lawyer’s persistent campaign against him, although there was apparently some personal pique involved.  She did not work for Tony in the SERS Investment Office and, according to one source, had limited knowledge and experience in investment matters.

We will just restate that Ms. X brought her allegations to both her outgoing boss, Chief Counsel Yun and, a few weeks later, to her new boss, Acting Chief Counsel Page-Wooten and there is no evidence we can find in public records that either of these senior attorneys placed any credence in her allegations at the time.  Ms. X, deeming herself a whistle-blower, then went directly to a SERS board member and to OGC main office (which is part of the Governor’s office) with her concerns.

Tony maintains that all of his investment decisions had been properly and routinely vetted by both Chairman Maiale and Chief Counsel Yun, with both of whom he had good working relationships.  Unfortunately for him a lot of that institutional memory left as Mr. Yun retired in June, 2013.

Board member Oliver Mitchell, a senior corporate lawyer and former assistant attorney with the U.S. Department of Justice, acknowledged receipt of personal e-mails from Ms. X, but there is nothing to indicate what action, if any, he took to inform other SERS board members.

We do know that the lawyers at OGC Main took Ms. X’s complaints seriously.  They worried specifically that SERS might have some legal duty to report her allegations to the SEC, even if their substance hadn’t been confirmed.

On Nov. 26, 2013 Ms. Page-Wooten met with Chairman Maiale to give him a heads-up about the allegations against Mr. Clark.  On December 2nd he in turn directly informed Mr. Clark, although the lawyer had advised him not to.

Mr. Maiale was clearly displeased that these allegations had been rattling around for many weeks without anyone bothering to notify him.  The lawyers were displeased that he had disclosed the investigation to Mr. Clark.

Mr. Clark was stunned.

On Dec. 11 lawyers at OGC main office wrote formally to Mr. Maiale and the whole SERS board.  Among other things they tried to justify the delay in advising Mr. Maiale and the board about the allegations.  All of the charges in this letter, including an outside counsel’s report on any possible SEC notification, were essentially regurgitations of the original concerns raised by Ms. X, none of which had been independently verified by anyone. A Pittsburgh Post-Gazette article contains a full account.

On the same day, Dec. 11, the SERS board met and the allegations were disclosed to all members in closed session.

That OGC letter to the board was not immediately made public but on Dec. 12 Treasurer McCord wrote his own open letter to Governor Tom Corbett (which he simultaneously posted on the Treasurer’s website and conveyed to the Philadelphia Inquirer) demanding that Messrs. Maiale and Clark be fired.

On that same day, the state’s Attorney General, Kathleen Kane, involved herself by publicly demanding that SERS email and computer records be turned over to her office in case civil or criminal action was required.

Ms. Kane was a Democratic party rising star in Pennsylvania and at just about that same time she was signaling that she would make a bid to run for the U.S. Senate against incumbent Republican Sen. Pat Toomey.

Both Mr. Clark and Mr. Maiale announced their resignations almost immediately; Mr. Clark resigned effective Dec. 31, and Mr. Maiale offered his resignation to the board on Jan. 22.

Mr. Maiale, after 22 years in office, and against whom there were no substantive charges except Mr. McCord’s public hectoring, seemed to feel that he didn’t need the aggravation and decided to hang it up.

On Jan. 6, 2014, that OGC letter to SERS (labeled a confidential attorney-client work product) was leaked by someone on the board (almost certainly Rob McCord) to the Pittsburgh Post-Gazette, which posted it online.  Our friends at ai-CIO magazine picked it up a few days later, so the allegations against Mr. Clark were now widely disseminated in the professional institutional investment community.

Mr. McCord, whose campaign for governor was now in full swing (with the primary just four months away), was pushing a full-tilt media campaign against both men using charges which were still essentially the unverified allegations of a single junior staff lawyer.

The OGC had urged the state Inspector General’s office to start their own investigation, which they did; and also advised the SERS board to hire their own outside firm to do an independent investigation.  They did so, hiring the Obermayer law firm.

The Obermayer firm’s investigation eventually included 22 comprehensive interviews with current and former SERS personnel, board members, and consultants; they also reviewed Clark’s computer files at SERS.

Eighteen long months after Ms. X first made her accusations against Mr. Clark they had finally been independently investigated and found to be baseless.  All investigations targeting Mr. Clark by various state agencies were then terminated.

The body of the report is confidential, but the publicly released cover letter essentially absolved Mr. Clark of any wrongdoing or illegality.  Among other things they found no basis whatsoever for any “day-trading” charges against him.  And, like an earlier outside law firm, they concluded that no SEC notification had ever been required.

Endgame and aftermath

Governor Corbett, responding to Mr. McCord’s public attack on Chairman Maiale, replaced Mr. Maiale as SERS board chairman with Glenn Becker, whom he had first appointed to the board in May, 2013.

Mr. Becker is president of a money manager called Swarthmore Group. Swarthmore had been doing business with Mr. McCord’s state treasury for years as an external manager of equities, typically earning annual fees in excess of $1 million.

Swarthmore has been hired and fired as an external manager by Montgomery County, Bucks County, and Philadelphia, according to reporter Joseph DiStefano at the Philadelphia Inquirer.  And, Mr. McCord’s Treasury office dropped them as managers of the state’s college savings program in 2013.

We also note that Mr. Becker’s boss, Swarthmore CEO Paula Mandle donated $5,000 to Mr. McCord when he began his first run for treasurer in 2007. Mr. McCord’s campaign donors are all listed here.

When the Becker appointment was announced, Mr. McCord’s office immediately registered his enthusiasm, announcing that “Treasurer McCord has known Glenn Becker for a number of years.  He is looking forward to working with him.”

Mr. Becker, who earned his MBA from Drexel University, has a long resume in the investment industry, consisting mostly of business development/client relations jobs.  And he and his firm have excellent political connections in Pennsylvania.

Although the individuals he warred against – Mr. Maiale and Mr. Clark – are gone, and his preferred candidate, Mr. Becker, is now SERS chairman, Mr. McCord probably doesn’t care anymore, since his own political career came crashing down in February.

He had already failed to get the Democratic nomination for Governor in 2014.  He was out-politicked by Tom Wolf, and he finished third in the May Democratic primary despite having raised a considerable war-chest.  Mr. Wolf won the general election in September and was sworn in as governor in January.

Then, on Jan. 29, 2015, Mr. McCord suddenly tweeted that his mission at the Treasury was accomplished and that it was time to return to private life, although his term had two years to run.

The other shoe dropped the next day, when he announced that he was pleading guilty to federal charges of campaign finance violations.  It appears that he had leaned on several money-management firms for contributions to his campaign, suggesting that otherwise they might lose access to state business.

Follow-up reports indicate that it wasn’t just a few money managers doing business with the Treasurer’s office who were hit with Mr. McCord’s pay-for-play offers.  There were others.

An un-named SERS official told a reporter that he had had to reassure external managers that they did not have to donate to Mr. McCord in order to keep doing business with the pension fund. “If they asked me if they had to give (to McCord’s campaigns), I’d tell them absolutely no.”

Attorney General Kane, who had added the weight of her office to the nebulous charges against Tony Clark, was investigated by a Montgomery County special prosecutor and grand jury for leaking grand jury information to embarrass her political enemies.

In January they recommended that she should be charged with perjury and contempt of court.  In February, The New York Times sympathetically reported on her dashed hopes for a Senate seat in 2016. Now, in August, 2015, the Montgomery County prosecutor has formally filed criminal charges against her.

In December, 2014 the SERS board promoted Deputy CIO (and Acting CIO since Mr. Clark’s departure) Thomas F. Brier to permanent CIO.

And what about Ms. X, the junior staff attorney at SERS whose charges against Tony Clark proved to be unfounded?  She has a new post unrelated to investments at the Pennsylvania Department of Corrections.  That will be her seventh job since getting her law degree in 2003.


Charles A. Skorina & Co is retained by the boards of institutional investors and asset managers to recruit chief investment officers, portfolio managers, and financial professionals.

Charles Skorina earned an MBA at the University of Chicago and began his professional career at Chemical Bank (now JPMorgan Chase), completing the management training program then working as a credit and risk analyst in New York and Chicago.  After a stint with Ernst & Young in Washington, D.C., he founded his own search firm headquartered in San Francisco, focused on the global financial services industry.

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