Pension losses mount
Local boards face renewed scrutiny
The year was 1999, the economy was booming, and hopes were high that a small, unknown venture-capital fund investing in American and Chinese businesses would deliver a big payday to suburban pension funds.
If all went as expected, the Oregon-based First America Asia Fund LLC, operated by the Cutler Investment Group, could return an eye-popping 35 or 40 percent profit to the Massachusetts municipal pension boards willing to invest their millions in it. Several jumped at what appeared to be a ground-floor investment in a wide-open economic frontier.
Between 1999 and 2003, the Middlesex Retirement System, which covers employees and retirees of public agencies across the county, sunk $6.9 million into the fund. Natick, Brockton, Haverhill, and Salem's retirement boards each invested between $1 million and $4 million. In all, Massachusetts public pension funds invested more than $15 million in First America, which at one point reported assets worth $33 million.
Now, though, the First America fund appears defunct, and local officials are counting their losses. Late last year, the retirement boards for Middlesex County and Salem, which sunk $1.6 million into the fund, wrote off their full investments for $1. Natick and Brockton - which invested $3.5 million and $3.6 million, respectively - have not yet written off their investments, but they may have to in coming months.
The losses have raised anew the question of whether public pension fund investments should be left in the hands of local officials or run by the state in a pooled system.
Local retirement boards were starting to get concerned about the First America Asia Fund in early 2003, and its director, Matthew C. Patten, a Boston College graduate then in his late 20s, made a visit to Boston to reassure his jittery investors.
Patten did not return recent calls from the Globe seeking a comment, but the Cutler Investment Group's website describes him as a company president who lived in Shanghai from 1999 to 2006, and a member of the American Chamber of Commerce there.
One of the most important stops during his trip to the Boston area was at the office of Robert Dennis, investment director at the Public Employment Retirement Administration Commission, or PERAC, the regulatory body that oversees Massachusetts pension systems.
"I think he came in because people were starting to question the validity and credibility" of the fund, recalled Dennis, who said his brief meeting with Patten did not "raise any alarms that he was not being straightforward with us."
Patten described various business ventures between American and Chinese companies, including one that made bathtub shower doors sold in local
The Middlesex Retirement Board chairman, Tom Gibson, said his system's worries increased the following year. Before the First America investment, Cutler Investment Group managed a successful domestic equities fund that was among the Billerica-based board's investments, he said, and Middlesex had a successful relationship with its top executive, Brooke Cutler Ashland. Then, said Gibson, Middlesex officials started having trouble getting regular updates on First America from Cutler managers.
"When that happens, alarm bells go off. Then we asked for an audit, and they wanted a release from liabilities, and then more alarm bells went off," said Gibson, who was the Middlesex board's attorney at the time.
In what would turn out to be the last communication from the First America fund in 2006, the Natick Retirement Board was told its $3.5 million investment was worth $2.6 million, said its lawyer, Michael Sacco. Since then, calls and e-mails seeking information on Natick's investment have gone unreturned, Sacco said.
First America's biggest investor, the New Orleans Firefighters Pension Fund, is pursuing a lawsuit that it filed against the Cutler Investment Group, as investigators try to determine what, if any, value remains in the venture project.
"Now the question is, is this an investment that went wrong, as risky investments can do, or something worse?" said Gibson. "That's what we're waiting to find out." Of the Massachusetts retirement boards that invested in the fund, only the Haverhill and Middlesex systems are named as plaintiffs in the New Orleans suit. The other municipal investors are watching the situation keenly, hoping some of the steep losses can be recovered, said Sacco.
But hope appears dim.
The First America Asia Fund debacle calls into question the decisions by the small, volunteer-run pension boards that invested so heavily in a high-risk venture in an emerging economic market like China.
It has also revived a thorny debate over whether most boards would be better off merging into the Pension Reserves Investment Trust, the state's $50 billion pooled investment system.
The Middlesex Retirement System, valued at $750 million, elected to join the state's PRIT fund last year for reasons unrelated to the First America Asia loss. The regional board continues to maintain control of some assets, administers pension benefits to retirees, and collects employee contributions, Gibson said.
The Natick board has been criticized for spending $63,000 to travel to luxurious conferences, and achieving investment returns that lagged behind the state system, after showing gains of slightly more than 10 percent over the past five years while the PRIT fund was gaining 16 percent.
According to the state retirement commission's investment report for 2007, released last week, Natick's gain for the year was 9.14 percent, while the state fund's return was 11.9 percent. And Natick's results may drop even lower when the First America Asia Fund loss is accounted for, pension officials warned.
Natick invested 5 percent of its then-$66 million portfolio in First America Asia. No other Massachusetts retirement board invested as large a percentage of its portfolio in First America, and so their losses represented smaller portions of their holdings.
"One has to question whether the board was exercising good principles of diversifications in making such a large investment," said PERAC's Dennis. "It's not at all unusual for Natick, or anyone else, to make an investment with some risk attached. Sometimes those work out very well. But by putting all their eggs in one basket, so to speak, they entailed above-average risk and multiplied that risk."
But, Sacco said, hindsight is always 20/20. "If First America had returned as promised, nobody would be complaining about diversification," he said.
Haverhill's pension system, one of the highest-earning suburban pension funds in the state, may have also lost $3 million in First America Asia Fund investments, which shows that any board had the potential to be a victim, said Sacco.
"It's an aberration," said Sacco. "To have something occur like this over the thousands of investments made by dozens of retirement boards is clearly the exception, not the rule."
Erica Noonan can be reached at enoonan@globe.com. 