Question: What’s worse than having your retirement savings invested in funds that fail to provide you with a prospectus before you invest?
Answer: Funds that demand you pay money to view their prospectuses.
Question: What’s worse than having to pay for prospectuses of funds in which your retirement savings are invested?
Answer: Paying $10,000 for the documents and still not getting them.
The questions and answers above sound like bad jokes and they’re not funny.
But that’s exactly what happened when retired school teachers in Rhode Island requested the prospectuses of the funds in which the $7 billion-plus state pension had invested their money. Thirty-one year old General Treasurer Seth Magaziner demanded the elders pay $10,000 for the documents and then, after the retirees had raised the monies and paid him, he refused to provide the offering documents.
Worse still, it’s happening to public pension stakeholders around the nation—not just in tiny Rhode Island. Simply put, state pension officials are withholding prospectuses from investors, i.e., taxpayers and participants, in funds.
As a former SEC attorney, it is unthinkable to me that the fundamental premise of our federal and state securities laws—full disclosure of all material facts in a prospectus delivered to the investor prior to an investment decision—has been effectively circumvented by a corrupt partnership between Wall Street and state and local elected officials. The SEC and state securities regulators should intervene to put an end to this stonewalling and fleecing, in my opinion.
Rhode Island Attorney General Peter Kilmartin’s website sternly warns, “In Rhode Island, there is a mandatory duty of all citizens to report a suspicion of … elder financial exploitation.” Kilmartin, whose pat response to any problem is to claim he lacks the power or resources to act, should investigate.
Here are the facts:
On February 25, 2016, the Rhode Island Retired Teachers Association requested from the Office of the General Treasurer the following information related to the Employee Retirement System of Rhode Island’s real estate investments:
- Copies of all analyses, reports, and summaries related to ERSRI’s real estate investments, as well as the investment performance and total fees related to these investments.
- Copies of any prospectuses, offering memoranda, subscription agreements and any side letters or agreements related to these real estate investments.
- Copies of any correspondence or communications related to these real estate investments.
- Copies of any contracts between the Fund and any real estate investment consultant or other party providing analyses or recommendations related to the Fund’s real estate investments.
While certain documents were provided in response, Treasurer Magaziner’s office demanded $10,893 from the retirees to search, retrieve and copy the rest of the real estate documents requested.
Notably, not one of the key documents—prospectuses, offering memorandum, subscription agreements or side letters or agreements related to ERSRI’s real estate investments was provided in response to the initial request.
On April 11, 2016, the Rhode Island Retired Teachers Association sent a check in the amount of $10,000, as demanded by Treasurer Magaziner as a prepayment to access pension real estate records. On May 9, 2016, the Treasurer’s office responded by sending approximately 60 separate emails.
The first email indicated that the search, retrieval, review and redaction of some of the supplemental documents requested had taken an astounding 489.5 hours and that the total cost of the search and retrieval related to those documents was $7,342.50. Accordingly, $7,342.50 would be subtracted from the prepayment amount and $2657.50 would be refunded to the Rhode Island Retired Teachers Association.
While certain Subscription Agreements, brochures and marketing materials were provided, these documents were substantially redacted, concealing the most critical information, such as strategies, past performance, fees and risks.
The retirees request for the legally-significant prospectuses, offering memoranda and side letters related to real estate investments was again denied—despite payment of the $10,000 fee.
The Treasurer’s office stated “these documents contain such significant proprietary and trade secret information that no portions of the documents contain reasonable segregable information that is releasable.”
The federal securities laws generally require that investors be provided with a prospectus or offering document containing all material terms related to an investment prior to investing.
As is commonly noted in summary investment presentations and brochures, “investors should read and understand the prospectus before deciding whether or not to invest in the fund.” Similarly, for private placements to accredited investors the prospective investor must receive sufficient information to make an informed decision as to whether to purchase the relevant security. The most straightforward way to ensure that a prospective investor receives this level of disclosure, and that the manager can prove that such disclosure was provided, is through the delivery of an offering memorandum.
For a fund manager to deny access to prospectuses and offering memoranda prior to any investment decision, and merely provide promotional material to investors, is potentially misleading and may violate general antifraud provisions of the federal and state securities laws. Yet withholding such critical information from pension stakeholders is precisely the policy of the Treasurer’s office.
Finally, the notion that “these documents contain such significant proprietary and trade secret information that no portions of the documents contain reasonable segregable information that is releasable,” was laughable.
The overwhelming majority of information in prospectuses and offering memoranda (my estimate- 75 percent) is disclosed in the investment manager’s Form ADV filed online with the SEC, or amounts to legal boilerplate. Such information is readily segregable from any supposed “secrets.”
It appears the young Treasurer’s office has limited knowledge as to the sources of content for private placement documents.
On May 24, 2016, I sent an email to Patrick Marr and David Ortiz in the Treasurer’s office stating:
Since the marketing and other information you have provided regarding ERSRI’s real estate investments is potentially misleading to investors/stakeholders when unaccompanied by the Prospectuses or Offering Memoranda, I request that you refund to the Rhode Island Retired Teachers Association the full amount they have paid to date.
While I did not receive a response to my email, in an article regarding the requested refund inGoLocalProv, the Treasurer’s office apparently declined.
“The Treasurer’s office defended their decision.”This is not a matter of choice. We are contractually prevented from making the prospectuses public, and doing so would give sensitive strategic information to competitors of the funds that we invest in, which would hurt our performance,” said David Ortiz, spokesperson for Magaziner. “The proprietary nature of these documents is not unique to Rhode Island. Our office is a national leader in investment transparency, and has consistently pushed for greater disclosure—but we can’t violate our contractual obligations or intentionally undermine the investment performance of the pension fund.”
On May 31, I sent an email to Patrick Marr and David Ortiz in the Treasurer’s office stating:
While you may have “no choice,” as Mr. Ortiz commented in a recent GoLocal article, regarding providing public access to real estate prospectuses, etc., you do have a choice as to refunding the approximately $7,500 the retired teachers paid to access those documents. Under the circumstances, I think fairness dictates a refund.
It is unacceptable, in my opinion, to deny prospectuses for public employees of modest means whose retirement savings are invested in high-risk, high-cost hedge, private equity and real estate funds when wealthy investors in these funds are always provided such documents—for free.
If Treasurer Magaziner had no intention of providing the retirees with the prospectuses and other key documents they requested, he should never have cashed the elders’ check. Shame on him.