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Oregon Investment Council
Unofficial Minutes Prepared by Bill Parish
September 26, 2007

The Oregon Investment Council was called to order at 9:00 at PERS headquarters in Tigard by Chair Dick Solomon. In the meeting the board awarded $1.2 billion in investment management contracts.

OIC Members Present Included: Paul Cleary, Dick Solomon, Mark Gardiner (Gardiner's last meeting after serving 8 years) and Randall Edwards, Katy Durant and Harry Demorest

Key Consultants Present Included: David Fann, Pacific Corporate Group

Staff Members Present Included: Jay Fewel, Linda Haglund, Norma Harvey, Perrin Lim, Michael Mueller, Kevin Nordhill and Ron Schmitz

Investment Firms Present:   Leon Black, Founding partner Apollo Private Equity
                                               Steve Schneider and Joe Landy, Warburg Pincus
                                                Desmund Shirazi, Oaktree Capital
                                               Mark Williams, Blackrock Capital

Legal Counsel:                      D. Kevin Carlson, Oregon Department of Justice

I. Summary of Agenda

Highlights of the meeting included the following:

Investment Contracts Awarded: $1.2 billion was awarded as follows: Apollo Private Equity $425M, Warburg Pincus Private Equity $425M, Oaktree Private Equity $200M and Blackrock $200M. State Treasurer Randall Edwards highlighted that the Blackrock deal was put together in only 11 days. There was no discussion regarding the fact that Blackrock is now 50 percent owned by Merrill Lynch.

  1. Leon Black Presents: The founder of Apollo, Leon Black, with a personal net worth estimated at $4-5 billion, made an extended presentation for Apollo. Black's presence highlights the importance of these public pension dollars. It was refreshing to hear Black say their strategy was not to load up companies acquired with debt. Black sees continued difficulty for banks over the next year as they are forced to meet loan commitments for various takeovers already in the works, yet nothing that can't be worked out. After his presentation I asked Black how they accounted for tax benefits given that public pensions like PERS are tax exempt. Are you able to shift those benefits to other partners, I asked?

    Black replied “show me a way and we'll consider it.” Clearly, Black realizes that would be illegal, essentially using the tax exemptions twice. My response was, with no disclosure, who is to know, especially with so many of his competitors now based in the Caymen Islands.

    My advice to Black would be to conduct an internal audit and make sure this is not happening given that far too many CEO's have been hoodwinked into using tax strategies that were later proven to be inappropriate. A good example being Bill Esprey of Sprint, who had to resign upon the IRS hitting him for $300 million in back personal taxes due to a sheltering technique that was approved by his accountants but denied by the IRS. Clearly, such tax exempt status on the part of public pensions, endowments and foundations must be earned and what is to stop the IRS from auditing these entities to ensure compliance, thereby gaining a window into the accounting for hedge funds.  Something that clearly should be prepared for.

  2. Common School Fund Gets Aggressive: Policies were changed to allow the Common School Fund to invest in private equity funds for the first time, beginning with an allocation of 10 percent or $50 million.  This significantly increases the fund's risk profile.

  3. PERS New Higher Risk Profile: Oregon PERS is now allocated 73 percent to stock and related equity and real estate investments and only 27 percent to fixed income. Clearly, this is not a balanced strategy. To a European it would seem ridiculous. It is noted in the August minutes that Paul Clearly, liason from the PERS administrative board, would like to see less risk and volatility given that the fund has now erased most of its deficit. Clearly, this request is being ignored by the Solomon led council as they make additional aggressive investments in the private equity and hedge fund areas.

  4. Solomon Discloses Conflict of Interest: Chair Solomon disclosed a potential conflict of interest in that he prepares the tax returns for one of Oaktree's principal's parents. In a remarkable statement he made the disclosure on the advise of counsel but also strongly emphasized that he did not perceive this as a conflict. It was as if he were talking about a couple of tickets to a basketball game rather than the $200 million Oaktree was granted.

It is no secret that Solomon's addition to the OIC and assendence to Chair was aggressively championed by Len Bergstein, the go to lobbyist on the democratic side. Bergstein was also nstrumented in supporting Warren Buffet's takeover of Pacific Corp, effectively thwarting efforts toward creating the same form of public power entity Buffett enjoys in his home town of Omaha. It has not been disclosed how many local utility executives returns Solomon prepares nor whether he has prepared Bergstein's tax return in the past.  This highlights why CPA's have been traditionally discouraged from such roles on investment councils.

4.5)  Former OIC Chair Gerard Drummond in attendance. It is not known if Drummond is affiliated with any of the firms presenting or whether he was simply enjoying seeing only friends at the three hour meeting, including Solomon who has been preparing Drummond's tax returns for years.. There are currently no restrictions on former council members working with OIC vendors, nor are there disclosures regarding which lobbyists these firms hire as part of their efforts to seek funding.

  1. Ben Westlund Alludes to Potential State Treasurer run. Westlund was in attentance. He indicated to me that this was his first OIC meeting in preparation for addressing his widely speculated announcement on October 3rd that he will be running as a Democrat for State Treasurer in 2008.

  2. Katy Durant discloses conflict of interest. The August 2007 minutes disclosed a conflict of interest regarding Katy Durant, whose family has invested with Endeavor capital, a local hedge fund operator. Neither the amount nor terms were disclosed and she abstained from the vote in which the OIC awarded $100 million in funding to Endeavor.

  1. OGSP Chooses British Based Barclays over US Based Vanguard. The OIC has added a series of “lifestyle funds” to a key employee based contribution plan offerred to most PERS participants. Remarkably, rather than choose Pennsylvania based Vanguard, the leader in low cost indexing and generally recognized as offerring the best college savings plans in the country, the Solomon led OIC chose Barclays. This is most unfortunate because Barclays is a key underwriter of securities with significant related conflicts of interest, in addition to focus on “enhanced indexes,” code words for higher fees and more risk, thereby defeating the broad diversification goal of indexing, goals Vangyard us true to.  The rationale stated for selecting Barclays was pricing power given existing relationships, yet my analysis sees those benefits as illusionary due to Barclay's reliance on less generally accepted indexes. Once again, one has to ask, why is Barclays succeeding here. And why is it that top notch firms like Vanguard don't expend much energy in trying to earn this business. Vanguard astutely recognizes this as “all politics” and that is unfortunate.

Just as OIC Chair Solomon and State Treasurer Edwards short changed parents with the choice of Oppenheimer for the college savings plan, a plan that pays advisors 5-7 percent kickbacks, while the Vanguard plan does not pay such kickbacks, they have similarly handicapped PERS participants by siding with the investment industry rather than the very participants they should be serving. In the corporate world this would be called a “breach of fiduciary duty.” Not to mention a general lack of common sense in awarding a substantial government contract to a foreign based firm.


Bill Parish

Parish & Company
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Portland, OR  97223
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