Private firm to investigate $95 million loss in state fund

Special to the Journal Sentinel

Madison The State of Wisconsin Investment Board will hire an independent firm to investigate employee involvement in the State Investment Fund's $95 million loss in derivatives investments.

The board expects to hire a firm within a week to do a complete review of "who knew what at what point," Board Chairman Philip Gelatt said at a news conference Thursday morning.

The action was taken partly in response to statements made by a suspended investment board employee, said Gelatt.

Investment director Richard Gibson was suspended March 16. He said last week that agency managers, including Executive Director Patricia Lipton, knew about the risky derivatives investments long before March.

Derivatives are investments whose values are derived from the movement of other securities or interest rates. Much of the State Investment Fund's loss was due to derivatives whose values were linked to the Mexican peso and interest rates in Mexico. The peso plunged in value against the dollar in December.

Lawrence Bensky, Gibson's attorney, said his client "welcomes a review of his performance and will fully cooperate. And, to the extent that it's an independent investigation, he is pleased."

The board makes an average of 1,700 stock transactions a month and delegates authority to investment directors to make purchase decisions, Lipton said.

The board has hired Price Waterhouse to investigate agency investment policies and controls. The Legislative Audit Bureau also has been ordered to review the board's controls and is expected to report within 60 days.

Gelatt wouldn't specify how widespread the investigation would be.

"We want to make sure we have a complete and honest reporting of what transpired. At this point there is no reason to have any suspicions with how things have been handled," Gelatt said. Needed to Restore Confidence

The investigation is necessary to restore public confidence in the fund after recent withdrawals by cities and other public bodies, Gelatt said. The cities of Milwaukee and Eau Claire and Milwaukee Area Technical College announced this week that they were withdrawing a total of $367 million from the fund.

"The integrity of the institution is under scrutiny now, and we want to take this action to clear the air as quickly and deliberately and accurately as possible," Gelatt said.

Lipton said the board could not continue to receive the kind of scrutiny that undermines its integrity.

"There are too many people who have their retirement bene fits and cash balances tied up in this organization, and to constantly run this through the mill where our integrity is being impugned is absolutely intolerable and cannot go on," she said.

The board also doesn't want to end up with another lengthy personnel battle, Gelatt said. Marshall Burkes, the board's former executive director, has filed a lawsuit over his 1989 dismissal. Burkes says he was dismissed for questioning commissions paid to lobbyist William Gerrard for deals he brought before the board.

Lipton denied a news report this week that said the board requested legislation to give it protection from lawsuits through sovereign immunity. Lipton said the request came from the Department of Justice and the Department of Administration. The legislative request has some technical problems and needs to be revised, Lipton said.

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