We recently learned of a story involving a local government investment pool, or LGIP, the Illinois Metropolitan Investment Fund (IMET) that may lose as much as $50 million in what it thought was a safe investment, a repo backed by USDA loans. The Chicago Tribune, which has been following the story, first wrote, "Questions Surround IMET's Decision to Buy Repurchase Agreements." They explain, "The securities, known as repurchase agreements, or repos, have long been used by investors to park large amounts of cash rather than depositing the money in banks where only the first $250,000 is insured."
The Tribune piece continues, "Repos are considered relatively safe investments because they are secured by collateral. Investment pools entrusted with public funds normally only enter into repurchase agreements that are secured by U.S. Treasury bonds or other debt issued by U.S. government agencies. They are considered the highest quality collateral and can be easily liquidated. IMET's collateral in the repo were private loans guaranteed by the U.S. Agriculture Department."
It explains, "Government investment pools like IMET are common. They allow local governments to combine funds for investment, providing investment diversity and strategies that local governments may not be able to find on their own. The pools are vulnerable to investment losses like any security. In Illinois, there is the state-managed pool run by the treasurer's office and a few pools like IMET created through interlocal cooperation agreements. IMET was established in 1996 [and[] created the convenience fund in 2003, billing it as short-term, fully collateralized investment vehicle. According to IMET documents, the fund is run like a money-market mutual fund by trying to maintain a stable $1 share price. The convenience fund's 12-month return as of Sept. 30, 2013, was 0.34 percent, compared with 0.05 percent for Illinois Funds, IMET said its in 2013 annual report."
The Tribune, writes in its latest update, "Advisor to Municipal Investment Fund Accused of Negligence." They discuss a lawsuit against the investment advisor, Milwaukee-based Pennant Management, for recommending the bad loans and touting them as "essentially risk-free." The article says, "Pennant's clients have lost nearly $180 million because the loans are allegedly fraudulent."
The article goes on to explain, "Starting in 2013, Pennant began acquiring loans from Orlando-based First Farmers Financial, which said the loans were guaranteed by the USDA. In all, Pennant bought 26 loans from First Farmers totaling nearly $180 million, according to court papers. According to the federal criminal complaint, First Farmers fabricated the USDA guarantees. Pennant also came to believe that the borrowers for the 26 loans do not exist, according to a suit filed by Pennant filed against First Farmers." The piece adds that First Farmers CEO Nikesh Patel was arrested in September and released on bond.
The Tribune article continues, "The Illinois Metropolitan Investment Fund, or IMET, is one of the biggest losers. It had $50.4 million invested, and the loss has rippled across the state. IMET runs an investment pool on behalf of almost 300 municipalities, public pension funds and other public entities in Illinois. The entire loss on the First Farmers repo involved public funds. Municipalities and public agencies invest operating funds with IMET and have had a portion of the investments frozen as IMET and Pennant seek to recover money."
IMET Chairman Jerry Ducay posted a letter to investors on its website in which he announces his intent to recover the loss. It says, "As a valued investor with IMET, you understandably have many questions regarding your investment, IMET's recovery efforts and the status of the Convenience Fund, which is why we wanted to update you on the latest information with regard to our efforts to obtain what we hope will be a full recovery of the approximately $50 million in fraudulent investments.... We want to assure you that this is an isolated incident and is contained as we have eliminated all other repurchase agreements from the Convenience Fund in an abundance of caution for IMET Participants."
Ducay continues, "Further, we have reviewed all other investments and the collateral pledged for these other investments. IMET has and will continue to evaluate its practices and policies in order to continue to protect the Convenience Fund's participants. At present, IMET's Convenience Fund portfolio consists of bank deposits which are collateralized by FDIC Insurance, government securities at 110 percent or Federal Home Loan Bank letters of credit. We will solicit RFP responses for investment advisory services for future needs and review the responses with third party consultants as appropriate . We will continue to make every effort to ensure that the investments of the Convenience Fund are prudent and safe."
The letter continues, "IMET has retained the law firm of Vedder Price P.C. to assist in the recovery of assets from all potentially responsible parties. Recovery efforts are well underway, and IMET successfully filed a motion to intervene in the Pennant litigation against FFF in order to best protect the Convenience Fund Participants' interests in these seized assets. IMET also filed a lawsuit against FFF in federal district court. Over the course of our 18-year history, IMET has provided outstanding investment options to our participants. This is the first time we have been the subject of criminal fraud, and we are taking all appropriate actions to guard against further such incidents. We are committed to continuing these updates, and appreciate your patience and understanding as we aggressively pursue legal redress in this matter."
IMET is not the first LGIP to run into problems over the years. In 1994, the Orange County (Calif.) Investment Pool went bankrupt, which also triggered some support events from California Tax Exempt Money Funds that owned O.C. debt. Also, in November 2007, the Florida State Board of Administration's Local Government Investment Pool had to implement a freeze on withdrawals after a run by investors -- a story we covered at the time, "State Board Halts Redemptions in Florida Local Govt Investment Pool."
