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Legal limbo: Attorney uses Forbes post on whistleblower Chris Tobe to turn up heat on SEC


Chris Tobe

For more than two years, whistleblower Chris Tobe has been a Cassandra, warning about pervasive corruption in Kentucky’s investments, corruption that has played a role in the state’s biggest financial crisis, the multi-billion dollar underfunding of public employee pension funds.

Corruption that could – in time – wallop taxpayers in the pocketbook if the state’s pension funds become insolvent, or city entities such as Metropolitan Sewer District have to pay for “investments” gone bad in deals that made brokers millions.

Without a Richie Farmer hook, Tobe’s warnings have gotten little traction locally since 2011. The exception is CN/2 reporter (and former Herald-Leader reporter) Ryan Alessi, who has dedicated large portions of his Pure Politics show to Tobe.

Now in Forbes magazine, a post by Tobe’s attorney Edward “Ted” Siedle – himself a former federal whistle blower – is turning up the heat on the Securities and Exchange Commission’s year-old Office of the Whistleblower for failing to protect Tobe after he says officials with Kentucky Retirement Systems savaged Tobe’s reputation after he exposed corruption.

SEC officials did not return calls for comment.

From Siedle’s post:

As a former SEC whistleblower I know only-too-well that potential defendants and others who may be culpable will always deny the whistleblower status of individuals alleging violations of law and attempt to discredit them. However, where parties potentially mislead the public as to the requirements of the SEC’s new whistleblower program in connection with retaliating against whistleblowers, I believe it is appropriate for the Commission to intervene and provide clarification to the public. Failure of the Commission to publicly clarify any misinformation circulated by potential defendants regarding the requirements of the new whistleblower program will only ensure that the SEC whistleblower initiative flounders.

In 2010, Tobe went to the FBI and SEC, exposing a system in which unqualified placement agents with accomplices inside the KRS were walking away with millions in fees – $12 million from 2007 until 2010. Kentucky, like all states, generates billions in public employee pension funds that have to be invested – typically conservatively invested – for future payouts. And like most states, Kentucky forbids “pay to play” – political donations in return for investment contracts.

Not surprisingly, KRS officials went after Tobe, charging he is not a legitimate whistleblower and is only trying to enrich himself. (As an incentive to expose wrongdoing, whistleblowers are entitled to a portion of funds recovered by the SEC.)

In June 2011, then-Kentucky Auditor Crit Luallen issued a report on placement agents that found wrong doing. But Luallen found no systemic corruption or pay to play, adding that without subpoena power to get the placement agents’ personal financial records, she could not determine whether there were payoffs.

From the Herald Leader:

A “placement agent” profited from his questionable access to major investment deals at the Kentucky Retirement Systems in violation of disclosure rules, according to a report released Tuesday by state Auditor Crit Luallen. Luallen’s staff spent months examining the role of placement agents, the middlemen who help private investment companies sell their products to the $13 billion pension fund for state and local government retirees. Luallen found nearly $11.6 million in fees paid or committed to placement agents from 2007 to 2010. Luallen said one placement agent in particular, Glen Sergeon of New York, enjoyed close access to KRS through his relationship with Adam Tosh, then KRS’ chief investment officer. Tosh resigned in 2010, shortly after internal auditors at KRS’s questioned him about nearly $6 million in fees paid to Sergeon in KRS deals. No other placement agent won more deals from KRS than Sergeon, auditors wrote.

In a related story, the Herald-Leader reported that Gov. Steve Beshear made phone calls to KRS officials, recommending two of the governor’s Democratic political supporters who worked on behalf of private investment companies vying be considered for investment contracts. Luallen said there was no reason to investigate the calls.

Luallen forwarded her findings to the SEC, which has subpoena power. Which is where the case stands today, with Tobe essentially in legal limbo until the SEC releases its conclusions about its Kentucky investigation.

Tobe attributes lack of interest by the major news outlets to the Democratic Party’s dominance in Kentucky: “There are too many politicians involved they like.”

On the national level, though, it’s a different story. Everyone from investment industry publications to Forbes has looked at the national pension crisis, the role of placement agents and the fate of whistleblowers such as Tobe.

Several states, including New York, have banned placement agents. New York Gov. Andrew Cuomo stated that placement agents are essentially lobbyists, whose stock-in-trade is gifts, favors and campaign contributions in return for getting investment deals.

In 2011, Forbes did an extensive investigative piece centered on placement agent Glen Roger Sergeon, Jr.‘s activities in Kentucky.

From the Forbes post, ” Secret Agent” by Zach O’Malley Greenburg:

In 2008 and 2009 Sergeon lined up such work with the $14.6 billion (assets) Kentucky Retirement Systems on behalf of seven money managers. One that paid Sergeon’s firm over $2 million was the Arrowhawk Durable Alpha Fund — an outfit that couldn’t have won over public officials with its track record because it was brand-new. Another startup, Crestview Partners II, paid Sergeon’s company $1.1 million. Sergeon, contacted by phone, politely declared, “I don’t talk to reporters,” and hung up. Such brush-offs are unlikely to end the questions about the $6 million that money managers paid Sergeon for lining up business with Kentucky’s pension fund. The figure represents nearly half the $13 million that investment funds paid placement agents for landing business with Kentucky between 2004 and 2009, according to a Kentucky auditor’s report released last summer.

Tobe feels that ultimately, he’ll be vindicated: “Pretty much everyone is waiting on the SEC.

“Most likely if it goes like I think it might, then the FBI will reopen the public corruption case at that time.”



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