Past wheeling and dealing using state pension fund money came to light recently in a Senate Financial Institutions and Rural Affairs committee hearing. I am a member of this committee.
Governor Walker asked the Senate to confirm his three nominations to the State of Wisconsin Investment Board (SWIB). Two of the Governor’s nominees appeared to have stellar credentials. The other nominee, John Petersen III, is a Madison real estate developer who served on the board for a decade during the Thompson administration.
Mr. Petersen presided over the board during a time when conflict of interest questions arose about risky international investments and less than arms-length-transactions occurred.
As I prepared for the committee hearing, I reviewed the work of the Legislative Audit Bureau and news accounts during the time of Mr. Petersen’s previous SWIB service. The following picture emerged.
During 1999, Mr. Petersen made a number of Asian trips; some related to SWIB business. He personally bought more than $50,000 of stock in a Korean investment management company called iRegent. In July of the same year SWIB entered into a strategic partnership with iRegent.
The state and the company in which Mr. Petersen held stock formed another company to buy up Korean financial institutions. The holding company was called Korean OnLine Limited (KOL).
The state invested $30 million in this new company. Mr. Petersen, who was board chair at the time, recused himself from the vote. In October 1999, the board adopted a policy that trustees traveling on board business must get the consent of the other trustees.
Seven months later records show the state owned 27% of KOL, the new holding company. Fifteen other investors held another twenty percent; three current and two former SWIB trustees owned stock in the parent company iRegent.
In July 2000, SWIB trustees voted to invest another $80 million of state money. This time Mr. Petersen did not recuse himself from the vote.
Under my questioning Mr. Petersen said to our committee, “In retrospect, should I have recused myself? Yeah. OK, but it was an indirect investment instead of a direct investment. The facts speak for themselves. It just didn’t occur to me at the time.”
Over the next year, the state lost $94.1 million in this investment. During the same time the state lost $91.9 million in another Korean investment. Trustees were also under the spotlight for an investment made in Heartland Advisors – a company that managed mutual funds. A SWIB trustee served on Heartland’s board of directors during the time SWIB purchased $8.3 million in distressed bonds.
Auditors found that one day before the Heartland-SWIB transaction was finalized, Heartland re-priced the bonds. Two weeks after the transaction, Heartland again re-priced the bonds. Investors filed suit and the Securities Exchange Commission obtained a court order to freeze some of Heartland’s assets.
Mr. Petersen, in his testimony to our committee pledged, “I’ve made mistakes as a person and arguably as a trustee. They will not be repeated.”
When I asked him how I could explain to my constituents that I had confidence in his nomination, he replied, “I’m probably the most experienced person available.”
Trustees must continually ensure their own interests are not in conflict with the actions of SWIB. Since many investment decisions are private transactions, citizens must trust that board members will act with absolute integrity.
I am convinced Mr. Petersen is not the candidate to serve as a SWIB trustee. I urge the Governor to withdraw his nomination and begin the search for a new nominee.
The keeper of the keys to an estimated $90 billion of state investment money must be above reproach.