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T pension fund’s failed investment went ahead despite early warning signs, files show

Michael Mulhern, then-chief of the MBTA pension fund, gave an update at an MBTA fiscal management meeting in April.Suzanne Kreiter/Globe Staff/File

When MBTA Retirement Fund board members met in March 2007 to consider sinking $25 million into a hedge fund, several of them weren’t convinced it was a smart move. They wondered whether the fund was too risky, too expensive, or even a good match for that slice of pension money, records recently obtained by the Globe show.

But a month later, the board’s executive director at the time, Michael Mulhern, recommended that they commit to the investment. He cited the “level of trust” they all had in the man pitching the deal, Karl White — who also happened to be Mulhern’s predecessor as chief of the $1.5 billion MBTA pension fund.


It turned out to be trust that was badly misguided.

The hedge fund, run by Fletcher Asset Management, where White had gone to work just 10 months earlier, eventually collapsed. The trustee overseeing New York-based Fletcher’s bankruptcy called the operation a fraud, and the pension fund lost every dollar it invested on behalf of the MBTA’s more than 12,000 employees and retirees.

Retirement board documents newly released to the Globe cast light on how the MBTA Retirement Fund trustees came to make such a disastrous move, and how they failed to promptly report the investment’s unraveling to transit workers and taxpayers.

The Globe requested documents related to the Fletcher investment in December 2013, after reporting on the loss and uncovering the White connection. The Massachusetts Bay Transportation Authority pension board refused to release the records, and the Globe sued in 2014 to have them made public.

The board provided heavily redacted records last week as part of a settlement in which the Globe agreed to dismiss the case and the pension board pledged to “voluntarily” respond to public records requests starting Jan. 1, when a broad update of the state’s public records law takes effect.


The fund, which covers 5,885 employees and 6,472 retirees and beneficiaries, was organized as a private trust in 1948. Its overseers historically have fought to operate in secret, claiming exemptions from state laws on conflicts of interest and public records, despite nearly $500 million in taxpayer funding over the past 10 years.

The new records law specifically calls on the MBTA Retirement Fund to comply for the first time. But the pension fund says it could decide to fight the law, maintaining the disclosure requirements are unconstitutional if applied to a private entity.

“Although it has no definite plans or intentions at this time of doing so, the fund may invoke its rights at any time,’’ pension board spokesman Steve Crawford said in a statement.

Mulhern, who declined to comment for this article, announced his resignation in June, days after Governor Charlie Baker signed the public records bill into law.

Mulhern is a former bus driver who served as MBTA general manager before retiring and taking the pension role in 2006. Records from the March, 16, 2007, board meeting detail his discussion with the board about shifting $110 million worth of pension money out of stocks and into less risky bonds. That had prompted a search for fixed-income managers, ranging from plain vanilla bond index funds to the Fletcher hedge fund.

At that March meeting, White attended a presentation to the board along with chief executive Alphonse “Buddy” Fletcher Jr. and a third Fletcher employee, Denis Kiely. They said their Fletcher Fixed Income Alpha Fund had produced a 10.3 percent annual return over a decade, outperforming a well-known Wall Street bond index by 3.8 percentage points. But the returns were theoretical, based on computer modeling; the Fletcher fund had yet to actually manage customer money.


One board member, Stephan MacDougall, then president of the Boston Carmen’s Union, Local 589, noted that Fletcher’s fees were high, according to the minutes.

Indeed, the Fletcher fund had by far the highest costs of the fixed-income investments being considered by the board: 2 percent annual fees, plus 20 percent of any gains, according to the records.

In response to MacDougall’s critique, Buddy Fletcher was unapologetic: You get what you pay for, he said.

During a meeting the next day, trustees raised other questions about Fletcher. Jonathan Davis, then the MBTA’s chief financial officer and a pension fund trustee, asked whether the investment fund really belonged under the pension’s core bond category, a relatively conservative grouping that included such stable investments as US Treasuries and corporate bonds.

The fund would have a one-year lockup, meaning that the MBTA pension fund couldn’t touch the money for a year, and only quarterly after that.

The pension fund’s outside consultant, Douglas Moseley of New England Pension Consultants, said Fletcher had a “capital preservation strategy,” using derivatives such as swaps and options to hedge against potential losses. “Their returns are consistent,’’ Moseley said, according to the minutes.

The MBTA pension fund also had experience with the firm; a prior investment it made in another Fletcher fund had so far been profitable. New England Pension Consultants declined to comment for this article.​


MacDougall urged prudence and said the board shouldn’t rush its decision. Janice Loux, then its chair, said the fees should be carefully vetted. Mulhern asked the board to give him a few weeks to talk to the various managers, and to do more research.

A month later, at the April 2007 meeting, Mulhern suggested that the board approve the Fletcher investment, “given his relationship with Karl White, the board’s former relationship with Karl White, and the level of trust,” the minutes read, “because it boils down to a character issue and a focus on capital preservation with low volatility.”

The board voted yes, making it the first investor in the fund, and Mulhern was charged with trying to negotiate lower fees.

Minutes from the June 2007 meeting offer only one line of follow-up, with no details. “Negotiated contract,” they read. “Significant discount which exceeded expectations.”

Four years later, the financial crisis had dented most of the pension fund’s investments, and White was no longer with Fletcher.

At a July 15, 2011, board meeting, Mulhern recommended closer scrutiny of the hedge fund by placing it on the pension fund’s “watch list,’’ after a Wall Street Journal story detailed Buddy Fletcher’s personal dispute at the Manhattan co-op building where he lived. The minutes cited “articles that reflect poorly on Mr. Fletcher’s reputation” — and “a pending $10 million redemption request” by the pension fund to withdraw money from the Fletcher fund.


Mulhern said he was making the watch list recommendation “not due to performance but rather reputational risk.” The board voted to go along with his advice.

The following month, after updating the board on the status of the Fletcher investment, Mulhern asked for permission to “manage this matter in the best interest of the [MBTA] fund.”

By the board’s September meeting, the $10 million withdrawal request had turned into a promissory note, according to the minutes. Mulhern said that after talking to people at Fletcher, as well as the fund administrator and auditor, he was “comfortable with Fletcher’s reported valuations,” but said the firm should remain on the watch list, and the $10 million note should be monitored.

In July 2012, Mulhern told the board the Fletcher fund had filed for bankruptcy protection in New York.

Fletcher declined to comment on the newly released files.

According to the newly disclosed records, the pension fund took three consecutive write-downs on the Fletcher investment, resulting in a total loss by 2013. The fund lost not just the $25 million, but the returns the money might have generated had it been invested differently over those five years.

As the investment deteriorated over the years, the board did not publicly acknowledge the problems, even in its annual reports. The 2012 report simply dropped Fletcher from a list of the fund’s investment firms.

The losses were not detailed in public financial records until the 2013 annual report — in December 2014.

Beth Healy can be reached at beth.healy@globe.com. Follow her on Twitter @HealyBeth.