CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER INTERDEPARTMENTAL CORRESPONDENCE

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1 CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER INTERDEPARTMENTAL CORRESPONDENCE Date: May 16, 2012 To: Retirement Board Members From: CU<Sangeeta Bhatia, Retirement Plan Manager Subject:. Board Agenda Item NO.6: Report from Pension Consulting Alliance Regarding Pending Litigation (May 23, 2012, Regular Retirement Board Meeting) The attached documents are provided for the Board's information. SB:jae Attachments 6.1

2 NW 11'" Avenue, Suite 203 Portland, OR Phone: Fax: :. May 11, 2012 Dear PCA Client: On May 7, 2012, PCA was served with a complaint naming the firm and its founder, Allan Emkin, as defendants along with the current and a former Oregon State Treasurer, the Executive Director of the Oregon Public Employees Retirement System (PERS), the PERS Board of Directors (including nine past and present members of the PERS Board individually), the Oregon Investment Council (including four past and present members of the OIC individually), the current and a former Oregon State Attorney General, various entities associated with the Lone Star family of real estate investment funds, and Lone Star's founder, among others. The suit was brought by two beneficiaries on behalf of the Oregon Public Employees Retirement Fund (OPERF) and seeks $1 billion in damages. For your reference, the case is styled Michael Forest & Davis Dyer on behalf of the Oregon Public Employees Retirement Fund v. Ted Wheeler et ai, and was filed in Multnomah County Circuit Court, Case No We are writing to provide you with a bit of background and context about the situation. The plaintiffs allege that certain wrongful acts, including breach of fiduciary duty, breach of contract, and securities law violations, occurred through OPERF's investments in various Lone Starmanaged investment vehicles made in and after Lawsuits can be filed for a variety of reasons; they, likewise, can be vigorously defended -- as the firm intends to do. PCA and its founder have retained the law firm of Stoel Rives LLP to aggressively protect their interests. PCA vigorously denies any wrongdoing whatsoever. Given the ongoing litigation, PCA is limited in what it can communicate at this time. However, the firm is confident that it will be vindicated, and is certain that this matter will in no way affect the high level of service you have come to expect from PCA. We will provide further updates from time to time going forward as the situation warrants.. Please direct all inquiries to Kay Ceserani. She can be reached at Very truly yours, 6.2

3 ~ Oregon Live. com Everything Oregon Lawsuit against Lone Star Funds accuses Oregon Public Employees Pension System trustees, of risky investment business Published: Thursday, April 26, 2012, 6:06 PM Updated: Friday, April 27, 2012, 6:18 AM.... r I Ted Sickinger, The Oregonian By Two public employees on Thursday sued Lone Star Funds, one of the outside money managers most favored by Oregon's state pension fund, for fraud. The suit also accuses trustees of Oregon's $58 billion pension fund of ignoring the deception and committing $1 billion between 2008 and 2010 to risky real estate bets by Lone Star, a private equity outfit that has thrived by purchasing distressed companies and non-performing bank loans at deep discounts. I... The lawsuit focuses specifically on the state's View full size The Associated Press I alleged failure to conduct adequate due diligence I John Grayken of Lone Star Funds after testifying in South Korea.! before and after Lone Star and its top executive in manipulation in connection with their buyout of the Korea Exchange Bank. South Korea were convicted in 2008 of stock But it is also a broad indictment of the state's massive bets on risky private equity funds, and a see-no-evil-hear-no evil approach when it comes to money managers who generate profits. The suit was filed in Multnomah County Circuit Court by Michael Forest and Davis Dyer on behalf of the Oregon Public Employees Retirement funds. In addition to Lone Star, it names virtually everyone involved with overseeing the pension fund: PERS and Treasury staff; Treasurer Ted Wheeler and Attorney General John Kroger; the two citizens boards that oversee the pension system and its investments; and a consultant that helps Treasury vet and monitor real estate investments. Treasury spokesman James Sinks said Thursday the agency would need to analyze the lawsuit before commenting. A Lone Star spokesman said the suit was "entirely without merit." Oregon has a long, profitable and sometimes controversial history investing in private equity. 6.3

4 Treasury investment officers and the five citizens who make up the Oregon Investment Council have plowed billions of taxpayer and pensioner dollars into limited partnerships that invest in corporate buyouts, venture capital and distressed debt. The fund currently has approximately $17 billion invested in private equity and real estate partnerships -- about 30 percent of its assets. That doesn't count another $9.4 billion in commitments to private partnerships that have yet to be invested. Lone Star is one of the state's go-to managers. It has become one of world's best-known vulture investors by swooping in to make opportunistic purchases of troubled bank loans during periods of market upheaval. Lone Star founder John Grayken got his start as an adviser to Robert Bass, investing the Texas billionaire's money in troubled loans during the savings and loan crisis. When Grayken raised Lone Star's Fund I in 1996, Oregon's pension fund invested $75 million. Since then, the state has committed another $1.8 billion in eight successor funds, making PERS members and state taxpayers big players in salvaging troubled commercial real estate and subprime residential loans. Those countercyclical investments have proven profitable in the past. As a whole, they have returned about 1.5 times Oregon's initial investment, with assets still to be liquidated, according to Michael Mueller, the state's acting chief investment officer. Mueller said Thursday that Lone Star's are arguably the premier set of funds the state has invested in over the years. "Getting 1.5 times your money back is something we would take any time," he said. The lawsuit dates to a meeting in Tigard on Jan 30, 2008, where Grayken pitched the Oregon Investment Council on two new funds he was raising to buy distressed real estate and bank loans. That was just as the U.S. real estate and credit market were heading into full meltdown. Weeks before the meeting, Grayken testified as a defense witness in a Korean fraud trial where prosecutors accused Lone Star of driving down the price of Korea Exchange Bank's credit card unit before Lone Star bought the bank in Oregon was an investor in that transaction through its investments in previous Lone Star funds. At the meeting in Oregon, Grayken was asked about the allegations by a member of the Oregon Investment Council, but dismissed them as political issues that were largely resolved. The council didn't press the issue, and at the conclusion of the meeting, voted to invest $600 million in the two funds. Just two days later, the head of Lone Star's South Korean operations, Paul Yoo, was convicted of stock manipulation and sentenced to five years in prison. The guilty verdict was subsequently reduced, then reinstated in Lone Star and Grayken have consistently maintained that the prosecution was politically motivated by anti-foreign investor sentiment. The lawsuit filed Thursday fires both barrels at all involved. It accuses Lone Star of failing to fully inform the investment council of the truth behind the Korean charges, including the fact that Yoo, who was allegedly listed in Lone Star's offering materials for the funds, was in prison. 6.4

5 It accuses the Oregon Investment Council's real estate consultant, Nori Lietz, of abetting the fraud by failing to bring Lone Star's Korean issues to light during due diligence. The lawsuit notes the consultant subsequently flew to Korea and investigated Lone Star's activities, including a public apology and offer in 2006 to pay $106 million to an unspecified Korean charity. The offer was widely reported as a public mea culpa, though the lawsuit notes that such an offer would violate the Foreign Corrupt Practices Act. The state treasury and the Oregon Investment Council, a citizen's. panel appointed by the governor, are accused of ignoring the fraud, not only in 2008, but when Lone Star returned More The Oregonian's continuing coverage of the Oregon Public Employee Retirement System. in 2010 to seek investments in two new funds. The council committed another $400 million to Lone Star in The lawsuit says Kroger has a conflict of interest, as the attorney general's office advised the OlC that investing with Lone Star was prudent, and negotiated and drafted contracts w,ith Lone Star. Wheeler has been dealing with questions about Lone Star since he came to office in March 2010 after the death of Treasurer Ben Westlund. Meyer Eisenberg, a former deputy general counsel at the Securities and Exchange Commission who teaches at Willamette University, has urged both Wheeler and Kroger to launch a wider investigation of the pension fund's private equity investments, including Lone Star. In a letter last summer responding to pointed questions about Lone Star from House Co-speaker Bruce Hanna, Wheeler maintained that Lone Star had been exonerated and was "in compliance with the law." He noted the investment council's consultant researched questions about Lone Star, and the findings "matched the information that Oregon has gleaned from other sources." The lawsuit seeks recision of the Lone Star contracts, the return of at least $1 billion to the pension fund, damages for breach of contract by the investment council's consultant, and attorneys fees. "The overarching breach of duty is the investment in risky, subprime mortgage debt," said Jason Seibert, the Salem lawyer who filed the suit. "We're asking for the fund to be invested prudently, which is the statutory requirement." -- Ted Sickinger 2012 OregonLive.com. All rights reserved