Municipal-pension managers shouldn’t give money to advisers who invest it in funds run by others, a practice that sparked $14 million of losses tied to Bernard Madoff, labor union investment official Richard Ferlauto said.

Madoff Losses at Municipal Pensions Spur Investment Warning
By Jerry Hart and Josh Fineman

Jan. 10 (Bloomberg) -- Municipal-pension managers shouldn’t give money to advisers who invest it in funds run by others, a practice that sparked $14 million of losses tied to Bernard Madoff, labor union investment official Richard Ferlauto said.

“We generally recommend that investors be very careful when using a fund-of-funds strategy,” Ferlauto, director of pension- investment policy at the American Federation of State, County and Municipal Employees, said in an interview today. “They can’t be sure that the investment manager is doing the due diligence necessary on every asset manager they use.”

Municipal workers from New Orleans to New Mexico lost money after their pensions gave funds to advisers who invested with Madoff. The 70-year-old New Yorker was charged last month with directing a $50 billion Ponzi scheme in which returns came from money collected from new participants rather than from investments.

The City of New Orleans Employees’ Retirement System, which has $300 million of assets, had about $400,000 with Madoff through three so-called funds of funds, according to Jerry Davis, chairman of the trustee board.

Davis said in an interview today that the system had $175,000 invested with Union Bancaire Privee, a Swiss private bank that invested with Madoff through Ascot Partners LP and the same amount with Meridian Capital Partners through Tremont. He said he had a “tiny” amount with Silver Creek Partners, another fund that fed money to Madoff’s firm.

‘Aggressive Action’

“We expect the funds of funds to take aggressive action to recover the losses,” said Davis. “It’s extremely unlikely we would take direct legal action. It’s too small an issue for us. It’s aggravating to be stolen from, but sometimes you just have to depend on the law.”

The $1.5 billion Baltimore Police and Fire Pension Fund lost $3.5 million on Madoff investments, said Stephan Fugate, its chairman. New York-based UBP Asset Management invested about 5 percent of the $73 million it held for the pension fund with Madoff, Fugate told the Associated Press last month.

The town of Fairfield, Connecticut, said last month that its pension fund had about $42 million invested with Madoff through the Maxam Absolute Return Fund.

Bigger funds “have advance due diligence systems,” Ferlauto said. “They do a lot of work before they make investments that are usually directly with a manager and directly into funds. They don’t employ what I think is this riskier strategy of relying on someone else to do the due diligence.”

New Mexico

He said large funds including Ohio, the Connecticut state system, the California Public Employees Retirement System and the State of New Jersey, probably don’t have Madoff-related losses through funds of funds.

“I wouldn’t expect to find anything there,” he said.

The New Mexico Educational Retirement Board, the pension fund for about 96,000 active and retired teachers in New Mexico, had exposure of $9.7 million to Madoff, Bob Jacksha, chief investment officer for the board said in an interview.

That represents about 0.2 percent of the fund’s $6.5 billion. The board invested through Austin Capital Management’s Safe Harbor Fund.

“It will not affect the payment of retiree benefits,” the board said on its Web site.

Jesse Evans, the assistant manager for the New Orleans system, said the Madoff experience would probably lead to more due diligence from investment managers.

“When you hand money off to a manager, you’d better find out what he or she is doing once that money leaves their hands,” he said.

To contact the reporters on this story: Jerry Hart in Miami at jhart@bloomberg.net; Josh Fineman in New York at jfineman@bloomberg.net

Last Updated: January 10, 2009 00:01 EST