The MBTA Retirement Fund waited more than a year to disclose problems at a hedge fund firm where it had invested $10 million. The firm is now shutting down, its chief executive banned from the securities industry.
In its annual report, released Dec. 10, the $1.6 billion pension fund for transit workers said that it removed its money from Weston Capital Asset Management in September 2013. Nine months later, Weston Capital unraveled as federal securities regulators filed civil fraud charges against the firm and its top executives for allegedly draining $17 million from one of its hedge funds to other accounts and to themselves.
The T’s pension fund said it did not lose money on its 2009 Weston Capital investment. But this is the second time in a year the secretive MBTA retirement fund has belatedly acknowledged problems with its investments.
Last December, the Globe reported that the pension fund had lost $25 million on a hedge fund run by Fletcher Asset Management in New York — an investment recommended by the T fund’s former executive director, Karl White.
In that case, too, the pension fund did not keep close tabs on a risky investment. White had persuaded the trustees in 2007 to commit $25 million to Fletcher, his new employer. White left Fletcher the next year without telling the T. By 2011, the pension fund could not get its money out of Fletcher, which filed for bankruptcy protection in 2012. It was another year before the pension fund disclosed the loss to the public.
With Weston Capital, the T fund appears to have escaped unharmed. But investment specialists said changes in leadership and ownership at the firm at the time the agency was investing should have raised suspicions.
For instance, the firm’s chief investment officer left just months before the MBTA pension committed money to it. And five months after the T invested, Weston Capital’s founder and chief executive, Albert Hallac, agreed to sell the firm to a financially troubled company — a deal that would ultimately fall apart.
“Turnover is never good in that kind of a situation. You’re [investing] based on their record and their proven results,’’ said Timothy Vaill, the former chief executive of Boston Private Financial Holdings Inc., a banking and investment firm. “If you’re going to be hiring third-party managers, you’ve got to deeply dive into their world.”
A spokesman for the pension fund, Steve Crawford, said in an e-mailed statement that officials did not learn of the Securities and Exchange Commission’s investigation of Weston Capital until this year. But sometime in 2013, he said, the pension fund “initiated discussions with other” investors in the same hedge fund to withdraw their money.
Crawford declined to say why the T pension fund moved to get its money out of Weston at that time.
The Weston hedge fund that the T pension invested in was a so-called incubator fund. It did not buy stocks or bonds, but instead provided seed money to a bunch of startup hedge funds. Most pensions invest only in hedge funds with established track records, because startup funds generally carry much higher risk.
Moreover, the T pension fund bet on Weston Capital even though the firm’s chief investment officer had recently quit. And just five months after the T invested in June 2009, a financially troubled New York company called Fund.com sought to buy Weston Capital. A public filing with the SEC several months later, in January 2010, said Fund.com owed $2.5 million to lenders that it could not repay.
To complete the purchase of Weston, Fund.com sought to raise money from financiers, one of whom had been sanctioned by the SEC for falsifying financial documents.
The Fund.com acquisition eventually collapsed. Crawford, the pension spokesman, said the T “never had any business dealings or other relationship with Fund.com or any of its principals.”
The pension fund’s investment consultant, Marco Consulting Group of Chicago, declined to say whether it had recommended Weston Capital. Lawyers for Hallac and Weston Capital did not respond to requests for comment.
Harry Markopolos, an accountant credited with spotting Bernard Madoff’s Ponzi scheme early on, reviewed the MBTA pension fund reports and said the agency appears to have trouble monitoring its long list of 71 investment firms. “Why do they have so many managers?” he asked.
In the four years after making the Weston Capital investment, the MBTA fund said it took $5.9 million out of the firm. The other $4.3 million is at White Oak Global Advisors of San Francisco, in debt funds previously owned by Weston.
All told, the pension fund said it has so far made a modest $270,000 gain, or 2.7 percent, on its $10 million investment.
The information is coming out now because the MBTA released its 2013 annual report this month.
The MBTA pension fund is not required to follow Massachusetts public records laws or ethics rules that guide other pension funds for public workers. The T fund was organized as a private trust and has rebuffed public pressure for greater disclosure, despite $58 million in annual contributions by the taxpayer-funded MBTA.
By June 2014, Weston Capital, Hallac, his son Jeffrey, and the firm’s general counsel settled charges with the SEC that, starting in August 2011, they had funneled $17 million from one of their funds to another vehicle, without disclosing the move to investors. They also directed $750,000 to themselves.
The executives agreed to pay fines in the hundreds of thousands of dollars, without admitting to or denying the charges. Albert Hallac, 76, was permanently barred from the securities business.
The pension report said Weston Capital’s actions appear “entirely unrelated” to the MBTA’s investment. Still, it said officials are reviewing “the potential for any claims against Weston Capital or its principals.”
Beth Healy can be reached at email@example.com.