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Ex-pension chief violated rules, report says

He contacted bidding firms on Wall Street

By Michael Kranish
Globe Staff / May 15, 2009
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WASHINGTON - The former head of the nation's pension insurance agency, who last year pushed through a high-risk strategy that shifted the insurance fund heavily into stocks just before the market crash, committed a "clear violation" of agency rules by contacting Wall Street firms that were bidding to oversee the new policy, while also seeking the help of one firm in gaining employment, according to a government report.

Charles E. F. Millard, the former Lehman Brothers managing director who was the Bush administration's director of the Pension Benefit Guaranty Corporation from May 2007 until Jan. 20, pushed through a dramatic change in the way the agency invested its $64 billion insurance fund, shifting from a reliance mostly on conservative bonds to a strategy that put 55 percent of its portfolio in speculative investments such as stocks in emerging foreign countries, equity funds, and real estate.

The insurance fund backs the pensions of 44 million Americans. But it had an $11 billion deficit and its stock-related investments plunged 23 percent as of last September, before the brunt of the market crash. The agency has not released further information about the performance of its portfolio.

Shortly after the new investment strategy was adopted in February 2008, Millard began contacts with Wall Street firms that hoped to implement the new policy - even though he was warned by officials that such conversations were not allowed under federal bidding rules, according to a draft report by the agency's inspector general made public yesterday.

After the agency last fall hired the investment banking firm Goldman Sachs to oversee a $700 million portion of the fund, Millard e-mailed with a Goldman executive about a Wall Street job, according to the report. The Goldman Sachs official responded that he had talked with a person at another firm "who really likes you and if times were better he would have hired you already." The inspector general reported finding 29 e-mails documenting the effort of a Goldman Sachs official to help Millard "in his search for employment."

A Goldman Sachs spokeswoman, Andrea Raphael, declined comment. The inspector general said there was no evidence of criminal misconduct by the firm. Millard told the inspector general that it was "ridiculous" to suggest that he was seeking help in finding post-government employment.

Nonetheless, as a result of the report, the pension agency is considering whether to revoke the contracts with Goldman Sachs and two other firms, J.P. Morgan and BlackRock. The three firms were given contracts that could result in $100 million in fees over a 10-year period.

The report did not specify whether Millard faces any penalty for his actions. The inspector general, Rebecca Anne Batts, said in an interview yesterday that she is continuing to investigate Millard's actions.

Meanwhile, the revelation of the e-mail exchanges prompted several members of Congress, including Senator Edward M. Kennedy, Democrat of Massachusetts, to request a broader inquiry.

"The Inspector General's report raises very serious questions about the agency's processes as well as the conduct of its former director," Kennedy, who chairs the Committee on Health, Education Labor, and Pensions, said in a statement yesterday. "Millions of Americans count on the Pension Benefit Guaranty Corporation to protect their pensions, and we will continue to take steps to ensure retirees' funds are properly safeguarded now and in the future."

Millard's lawyer, Stan Brand, said in a telephone interview yesterday that his client did nothing wrong. He said Millard "followed all the rules" and said the e-mail exchange was being taken "out of context."

The Senate Special Committee on Aging, chaired by Senator Herbert Kohl of Wisconsin, announced yesterday that it has subpoenaed Millard to appear at a Wednesday hearing on whether the agency has enough money in its fund to back the nation's private pension plans.

At the same time, the agency has decided to "slow down" the implementation of investments in private equity and real estate, according to the report. The inspector general said she would leave questions about the soundness of the new investment policy to a forthcoming audit by her agency.

A number of experts have raised questions about Millard's decision to switch from a reliance on bonds to a more speculative strategy.

But Millard, in an interview earlier this year with Globe, insisted that putting the majority of the pension insurance fund into stocks and real estate was the only available way to obtain enough return on its investments to cover its obligations. "The new investment policy is not riskier than the old one," Millard said.

The pension agency last summer put out bids for contracts to help manage the new policy. Under the rules, Millard was prohibited from contacting the bidding agencies about the contract during a three-month "blackout" period.

However, despite being advised by officials against such contact, "he did not heed these warnings," the inspector general's report said.

The agency's procurement director told the inspector general that she had advised Millard "multiple times" not to have contact with the bidders.

When the inspector general asked Millard earlier this year about the contacts during the blackout period, he initially denied having the conversations, the report said.

Then, confronted with telephone logs, Millard said he would not have discussed the contracts with officials at the bidding firms.

The agency's acting director, Vince Snowbarger, said yesterday that he takes the report "very seriously" and that the board has accepted the recommendation that future directors "refrain from involvement in the procurement process."

The report did not specify whether Charles E. F. Millard will face any penalty.

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