The state auditors say they unraveled an apparent misunderstanding between the Connecticut pension fund and a Florida-based investment manager involved in the so-called Silvester scandal that could have cost the fund nearly $8 million.
In a new review of the state treasury’s financial operations over the last fiscal year, the auditors said they discovered that the investment manager for Westport Senior Living Investment Fund had sold a big retirement-care center in Bradenton, Fla., in which the pension held a 60 percent stake.
They said Westport — an investment partnership started with a $100 million infusion of state pension money authorized in 1998 by the corrupt former state treasurer, Paul Silvester — recorded a gain from the reported $95 million sale of the complex known as Freedom Village.
But they added that the gain was “not distributed entirely to the state,” and that “it appears the state was entitled to at least an additional$7,874,065, based on certain contractual provisions.” The treasury, the auditors continued, “seems to have been unaware that the investment manager appears to have retained cash in excess of any escrow requirements.”
Moreover, the auditors said it also seems the treasury “misunderstood certain information presented and believed that a substantial loss has occurred from the sale of the investment.”
That was corrected, the auditors said, subsequent to the auditors’ inquiry.
The auditors also challenged the fair value of Westport’s “remaining investments” in fiscal 2006, saying that the pension fund’s estimate “could not be reasonably substantiated.”
They said that as a result, treasury officials had reduced the fair value by $15.8 million to $58.9 million, a figure that reflected the capital invested by the pension fund.
“The treasury should ensure that the complexities of determining fair values and realizing gains for alternative assets within the Real Estate Fund are understood, that gains are distributed in accordance with contractual provisions, and that the related accounting is accurately reflected in the financial statements,” the auditors concluded.
Treasury officials responded that they concurred with the auditors’ finding and acknowledged “that there have been a number of issues” with Westport, according to the report. They added however, that the auditors shouldn’t assume the Westport case “to be representative of the process of accounting for the value of other real estate partnerships.”
The treasury officials also noted that it has been Westport’s general practice to “routinely withhold proceeds from the sale of properties as opposed to delivering the proceeds and immediately recalling the funds as capital calls.”
Similarly, they said they have had “varying degrees of success” in getting necessary information and documentation from Westport. The officials, however, vowed to get tougher, saying they would require a more thorough accounting detail of the distribution of funds by Westport and seek updated information about its reserves. They also said that “given the history with this particular investment,” they would “utilize the lower of cost or market valuation going forward.”
Westport was started by Lawrence L. Landry, a one-time college finance administrator and former chief financial officer at the Chicago-based John D. and Catherine T. McArthur Foundation. Landry initially sought $400 million from investors to establish the fund, but ended up with $160 million in startup money, with two-thirds of the capital coming from the investment authorized by Silvester. Silvester was convicted in 1999 on federal racketeering and money laundering charges that stemmed from kickbacks the former treasurer collected from cronies.
