UPDATE: Audit shows no fraud by former N.D. director

BISMARCK—An audit found no signs of fraud, illegal acts, violations or abuse by the former director of the North Dakota Retirement and Investment Office.

The North Dakota State Investment Board heard the results of the audit Friday, about four months after former director and chief investment officer Steve Cochrane killed himself.

Board member and State Treasurer Kelly Schmidt said the audit finding wasn’t surprising.

“We all had great confidence in Steve’s abilities. He served the people of North Dakota, as well as this board, well,” she said.

The board is responsible for the administration of the investment programs of several funds, including the Public Employees Retirement System, the Teachers’ Fund for Retirement and the Workforce Safety & Insurance Fund.

The board also maintains contractual relationships for investment management with certain political subdivisions.

The performance audit covered the period of July 1, 2009, through April 30, 2010, and included an analysis of Cochrane’s state e-mail and computer.

Auditors also reviewed all of the investment mangers’ contracts finalized during that time and reviewed transactions.

“Based on our review, there were zero transactions in the population provided in which the former executive director/CIO had exclusive fund transaction access,” the report said.

Thomas Rey of Clifton Gunderson, the firm that conducted the audit, said the structure of the North Dakota Retirement and Investment Office “is such that it’s 100-percent externally managed.”

“So, every dollar is externally managed,” Rey said. “It would be extremely difficult for Steve to get his hands on any money.”

Board Chairman and Lt. Gov. Jack Dalrymple said conducting the performance audit was worthwhile to determine there wasn’t anything irregular about Cochrane’s management.

“Beyond that, they did feel that they needed to analyze the performance of the Retirement and Investment Office as a whole, and they did come up with a number of recommendations on practices that they felt could be improved,” Dalrymple said.

Those recommendations include:

– Creating a deputy chief investment officer position. This position could offer continuity in the event the chief investment officer position is vacated and provide enhanced investment manager compliance reports.

The deputy could also assist in the due diligence and screening of prospective new investments, as well as with the monitoring of investment managers.

–Enhancing and updating the executive limitations policy pertaining to conflicts of interest.

–Having more than one person involved with the initial due diligence process prior to hiring an investment manager and having more documentation.

As for manager fees, Rey said public pension fund officials are increasingly asking their external investment managers for fee concessions. He recommended North Dakota consider this as well.

The board also reviewed financial data provided by Paul Erlendson of Callan Associates, an investment consulting firm. Although there’s been concern about the pension funds’ management, the funds are managed well, he said.

“Things are going according to expectation,” Erlendson said. “It’s just a bad market environment.”

Some of the state’s more sophisticated and complex strategies produce greater returns during periods of stability or good economic times, Dalrymple said. Those same kinds of strategies also suffer more during a poor economic period, he said.

The State Investment Board portfolio included $3.1 billion in pension funds and $1.6 billion in insurance funds as of June 30.

“Pension plans across the country are having trouble. North Dakota is no different,” said LeRoy “Gil” Gilbertson, interim executive director and chief investment officer. “The problems are not insurmountable in North Dakota.”

Lawmakers will consider proposals during the 2011 session to boost the funds.

In other business, the board received an update on the search for a new chief investment officer and executive director.

Resumes were received from 61 applicants, with 16 under consideration. The search committee will work next month to determine recommendations for the board.

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