A Times investigation

It paid to know Florida's pension fund boss; firm got deal despite red flags.

“Favors that benefit business acquaintances or employees are not part of the mix.’’ Ash Williams, State Board of Administration executive director, who says his actions have always been in the “sole economic interest’’ of pension fund participants and taxpayers.

COLIN HACKLEY | Special to the Times

“Favors that benefit business acquaintances or employees are not part of the mix.’’ Ash Williams, State Board of Administration executive director, who says his actions have always been in the “sole economic interest’’ of pension fund participants and taxpayers.

Ash Williams, executive director, State Board of Administration: "I categorically did not 'intervene on Bayview's behalf.' "

This is the story of how he did.

• • •

In the mortgage business, Bayview Financial Holdings is known as a "scratch and dent'' company. Its affiliates resell or package problem loans bought on the cheap. After the mortgage meltdown, Bayview saw opportunity in the flood of struggling homeowners facing foreclosure.

To raise capital to invest in problem mortgages, Bayview eyed Florida's pension fund, which handles $122 billion of retirement assets for nearly 1 million current and former public employees and their families.

The first two months of 2008, Stephen Mathews of Bayview Lending Group made overtures to Florida's chief financial officer and three officials at the State Board of Administration, the agency that invests pension fund money.

He started with SBA portfolio manager Carmen Fisher, who told him to try her colleague, Michael Lombardi. "This guy has called me twice and sent this e-mail,'' she wrote Lombardi.

He wouldn't see Mathews, and a referral from the CFO's office didn't help, either.

For his fourth try, Mathews sent SBA manager Ben Latham a 78-slide PowerPoint presentation and a note: "It is very important to us that we are on the SBA's radar.''

Latham forwarded the material up the line, all the way to a senior investment officer and the agency's deputy executive director.

Latham: "Do either of you have an interest in a meeting on this?''

The senior investment officer's reply: "I have none.''

Nonetheless, at the direction of Ash Williams and despite multiple red flags raised by his professional staff and two consultants, the state agreed to invest up to $100 million of pension fund money in a company led by an old business buddy of Williams.

The story is told in thousands of pages of e-mails, appointment calendars and secret reports and agreements, documents that Williams' agency redacted heavily and turned over, bit by bit, over the past six months.

The placement agent

Bayview dispatched the Park Hill Group, a middleman hired to raise capital for a new private fund the company was sponsoring. Park Hill stood to make as much as $2 million in commissions if it landed a deal with the SBA.

Park Hill assigned Tom Roberts.

On Oct. 20, 2008, Roberts e-mailed Lombardi and his boss, Jim Treanor, about Bayview Asset Management's new fund and talked up the Miami-based company's roots — "In state, and good! I'll follow up … TR.'' A month later, Roberts asked to meet with them:

"Hi guys. I hope you are doing well. This bloodbath in the markets is getting old. ... (Bayview could be a) timely opportunity given the state of our housing markets … take a quick look at their pitchbook, see whether it warrants a run over to Tallahassee.''

Four days later, Nov. 25, one of Treanor's staff analysts e-mailed his take on Bayview: "We looked over the opportunity and decided to stay away ... until the markets are a little more settled.''

Roberts got back to Treanor and Lombardi that afternoon. This time the middleman was name dropping, and the names were the CEO of Bayview, David Ertel, and the head of the agency that invests public money, Ash Williams, who joined the SBA the month before.

He ran the agency five years in the 1990s before he left for Wall Street. For almost a decade before returning to lead the SBA in October 2008, Williams was a managing director at Fir Tree Partners, a New York City hedge fund where he and Ertel were investors.

Roberts wrote to Lombardi and Treanor: "I'm not sure whether this helps or hurts, but clearly an easy call for you — Ash Williams I'm told is a good friend of Bayviews CEO, Dave Ertel. I believe Ash might also be an investor in Bayview as well.''

About an hour later Roberts' business partner, Paul L. Hudson, wrote Roberts to clarify the ties and dropped another name, Andrew Fredman, a former partner with Williams at Fir Tree and an investor with Williams and Ertel.

"I had my information wrong when we spoke earlier about Ash Williams (ex Fir Tree) and Bayview. Ash used to work at Fir Tree prior to (state of Florida). Fir Tree and Bayview have a close relationship and have worked together in the past.

"One of Fir Tree's team members, Andrew Friedman,(sic) is a close personal friend of David Ertel's and is invested in Bayview's Fund I. Ash is not an investor, and may not know David personally, but his prior firm and particularly Andrew know Bayview well. Sorry for the confusion. Hope that didn't get you into trouble.''

Roberts forwarded Lombardi and Treanor a copy of Hudson's clarification on the connections their new boss had with Bayview and added his own apology: ''Seems like I need to check all rumors, etc before blasting out emails, sorry. Still some tie . . ."

On Nov. 25, 2008, Treanor's unit declined to proceed with Bayview, despite the connection to the boss. Treanor told his analyst: ''I would hold off for now.''

'Feel free to contact me'

Five months later, April 13, 2009, Fredman contacted Williams. He suggested they get dinner the next time Williams visited South Florida. And did Williams remember his friends from Bayview who were Fir Tree investors, David Ertel and David Quint?

Fir Tree and Bayview frequently shared notes, Fredman wrote, and Ertel and Quint would make a good fit for an SBA investment.

Not only are they a big Florida employer, they're "far and away among the smartest/sav­viest folks'' in the mortgage servicing business, unlike many who were "morons, non-economically motivated or poorly supervised.''

Williams wrote Fredman — who the middleman said had been a Bayview investor — that he would be ''happy to do a call w/ the Bayview folks and if there is some current opportunity (should be given their expertise) we might be able to do something together.''

Fredman and Williams exchanged e-mails, about the marriage of Williams' daughter and the death of Fredman's mother, and on April 22, Fredman reminded Williams about dinner: "I would really — really — like to break bread with you. You are the only honest person (??) in politics I know!!!''

A few minutes later, Fredman copied Ertel and Quint on an introductory e-mail to Williams: "I'd like to introduce you to my very very good friends...'' Fredman wrote.

Less than a half-hour later, Williams replied, and copied Ertel and Quint: "The Bayview founders need no introduction!''

Williams addressed them directly: "David and David, please feel free to contact me to discuss current opportunities.''

Minutes later, he followed up with Fredman and accepted his invitation to dinner. "NP,'' no problem, Williams wrote. "We will break bread.''

Full speed ahead

Sixteen months trying and Bayview had been brushed off time and again. But after Andrew Fredman went outside channels and straight to the top of the SBA, his old Fir Tree partner welcomed Bayview aboard.

On April 30, eight days after Fredman introduced Williams and Ertel, the latter two were scheduled to speak by phone.

A meeting was set for 11 a.m. Friday, May 8, 2009, in Williams' office.

The evening before, Ertel sent Williams a pitchbook and other materials about Bayview's fund. At 7:20 p.m., Williams sent the presentation materials to his chief deputy, Kevin SigRist, and to Treanor, the senior investment officer in charge of selecting private investments. With apologies for the short notice, he invited the staff to the morning meeting with Ertel.

"Dave Ertel is one of the 2 founders of Bayview in Miami,'' Williams wrote. "They are very smart players in the mtge (mortgage) space.''

Treanor gave the boss his regrets. "Will be out of office.''

The next business day, SigRist suggested Treanor's unit review little-known Bayview ahead of two firms with higher-profile executives.

Citing the company's timetable for closing a deal, SigRist wrote: "Bayview has the highest priority.''

Williams seconded it: "I agree w/ Bayview priority.''

Five days later, Lombardi sent Treanor an SBA "approval memo'' that recommended the pension fund invest $100 million in Bayview. The process of selecting private investments calls for rigorous ''due diligence,'' a detailed evaluation of the potential deal, the risks, the SBA's history with the firm and issues such as pending lawsuits. Outside experts are paid to play a key role in identifying and reviewing the most attractive offerings.

The 10-page Bayview memo was hardly objective. Much of it was a copy-and-paste job from the Bayview marketing book that Ertel had sent Williams, with paragraphs and entire pages lifted verbatim. It touted the firm's experienced management team, sound oversight and reputation as a "trusted partner of the financial community.''

As required of all SBA approval memos, it addressed investment risks and said Bayview, which was shooting for 15 percent returns or more, had acted to ease them. There was no discussion of litigation, reference checks or outside experts' take on the deal.

The memo said: "Portfolio management recommends the approval of a $100 million commit­ment, subject to an acceptable negotiated legal structure'' and a review by the outside consultant the SBA paid for advice on private funds.

But the consultant, Hamilton Lane, was unenthusiastic. On May 26, 2009, the consultant e-mailed the SBA that Bayview lacked experience for the type of private equity deal Florida was considering: It's ''not an opportunity we will pursue broadly.''

Lombardi visited Bayview's offices in Miami and asked another SBA consultant, the Townsend Group, if it had looked at the company.

Townsend warned Florida to go slow. The consultant deemed Bayview's fund a ''niche strategy'' that no client other than Florida appeared interested in.

The process of selecting the best investments had been turned on its head. Per routine, the professional staff vets investment opportunities, pays outside experts for a thorough ''due diligence'' review and sends recommendations up the line.

In this case, professional staff had balked at Bayview at least six times, two consultants had declined to bless a deal with the firm, and the SBA's approval memo — written before the vetting was complete — mostly recounted the investment pitch.

The SBA said in a statement that its Bayview approval memo didn't include every detail of the staff's research, which the agency called "detailed and specific.''

No blind obedience

Though he had been made aware the boss had connections to the company, Treanor still called Bayview's track record as a private fund manager "a little thin.'' The performance of its only other private fund, Treanor wrote in May 2009, was ''slightly negative, (maybe close to flat with recent rally.)''

On Aug. 3, his unit dropped Bayview from its weekly reports on investment options, citing "concerns about market timing and federal government regulatory changes.''

That slowed down but did not kill the deal.

Eleven days later, Aug. 14, Williams spoke up for the deal. He wrote SigRist that he planned to consult again with Fredman — "one of the sharpest credit guys I've ever come across'' — and said Bayview's "process seems to have been validated by performance of the mtges (mortgages) they have bought/worked on.''

The professional staff remained skeptical, as did the Townsend Group.

On Sept. 22, 2009, SBA portfolio manager Joe Toomer wrote to Richard Brown, a Townsend principal: ''Based on what we saw in the market ... we just were not comfortable ... So we have cooled somewhat.''

Said Brown: ''I think you are correct, and taking a cautious view is prudent.''

Though Townsend and Hamilton Lane had declined to pursue Bayview, Williams was not deterred. On Dec. 17, at the SBA's invitation, Ertel and two Bayview executives visited Tallahassee. Williams and his top lieutenant, SigRist, flew back with them to Miami and conducted a ''walk-through'' of Bayview's offices.

Asked about Williams' and SigRist's notes or reports from the site visit, SBA spokesman Dennis MacKee said they took no notes, they wrote no report. ''It was an opportunity to do additional due diligence ... at no additional cost because it was in conjunction with a trip planned for other purposes,'' MacKee said.

Next morning, Williams e-mailed Treanor: "We had a nice (if damp) visit to Bayview last night.'' He noted ''the density of the staff, no wasted space or motion!''

Bayview's performance and fees still had Treanor uneasy. ''Seems a little rich on fees,'' he wrote.

Beware of risk

As the SBA moved toward making a $100 million deal with Bayview, warning signs abounded.

• A former senior Bayview manager had pleaded guilty to altering credit scores on more than 2,800 loans so he could collect $2.8 million in undeserved commissions.

(SBA staff noted it as a risk but said the company had cooperated in the federal investigation and improved its internal controls.)

• A search of public records documented that during the mortgage meltdown, a big bank reported losing more than $50 million in value of the $300 million it invested in Bayview Lending Group; Bayview affiliates laid off at least 500 of their 2,200-person work force.

(The SBA said it was aware of Bayview's "staffing patterns'' and didn't invest in the company's lending group.)

• The Townsend Group warned the investment could create "unanticipated publicity'' because Bayview's profits — tied in part to delinquent mortgages — could lead to people being foreclosed out of their homes.

Brown emphasized his conclusion in bold type: "This fund has not been approved by The Townsend Group.''

Townsend later did a full review and reported additional risks — about the size of Florida's investment and Bayview's decision not to register with the U.S. Securities and Exchange Commission.

Still, on May 20, 2010, Townsend gave its legal blessing. It wrote a ''prudent man'' letter, a usually routine opinion that an investment is suitable and a trustee responsible for investing funds is acting prudently.

On May 25, SigRist and Williams approved the investment staff's review even though questions remained. The SBA still wasn't sure how much of Bayview's fund would be invested globally and didn't have full details on how Bayview was insured.

On June 15, Sigrist said he talked to Treanor, Toomer and Lombardi. They were concerned about the "reasonableness'' of Bayview's mortgage servicing fees.

On June 17, Williams sent the staff a memo saying he would be out of the office the next 11 days and was leaving SigRist in charge for most of the time.

The first day of his absence, the final agreement with Bayview came over for the closing. SigRist signed the deal on Williams' behalf.

About a month later Bayview received its first payment, for $17,599,848, including $209,918 in management fees. The deal expires in 10 years, during which the state will pay Ertel and company multimillions more.

Four months later, Florida financial regulators said they were reviewing foreclosure practices at Bayview and 16 other mortgage firms.

A few days after that, the Wall Street rating agency Moody's placed Bayview on review for possible downgrade because of ''possible irregularities in Bayview's foreclosure process.''

Moody's said Bayview was investigating "possible issues'' with document notarization; the review is pending.

Bayview said in a statement that it has tight controls and that only a handful of senior employees execute foreclosure documents. The company portrayed the state review as routine and said foreclosure issues should not affect the fund Florida is invested in. The company also said it decided to pursue a less risky strategy in the fund.

Williams likes the deal

Williams said the SBA did a thorough review and feels good about its "wise'' investment in Bayview. "We are pleased with Bayview's performance thus far and confident that this fund is well positioned for the current investment environment.''

He said his ties to firms, including Bayview, were a positive, that Florida lucked out getting an SBA director with so many business contacts.

He said he never favored anyone and well understood his legal obligation to make deals in the "sole economic interest'' of Florida retirees and taxpayers: "We take our fiduciary responsibility seriously at the SBA. Favors that benefit business acquaintances or employees are not part of the mix.''

Williams said he did not recommend Bayview, and consideration of the company "commenced'' before he came to the SBA.

What conflict?

The three elected officials who oversee the SBA — Gov. Charlie Crist, Attorney General Bill McCollum and Chief Financial Officer Alex Sink — lost election bids and will be out Jan. 4. In their lame-duck meeting last month, without discussion, they renewed Williams' $325,000 annual salary. He is entitled to a bonus of up to 8 percent, $26,000.

Crist, McCollum and Sink declined to be interviewed for this story.

After the Times first reported on Bayview last summer, Williams wrote a letter to his trustee-bosses and said the newspaper's suggestion that he used his position to help friends is ''nonsense.''

"The newspaper is just plain wrong and the subject matter — personal integrity — is dear to me.''

The SBA then instituted a policy that requires staff with ''significant authority'' in the selection of private funds to avoid relationships that ''reflect adversely on the individual's objectivity, create conflicts of interest ... (or) impair their ability to make impartial decisions.''

Executives must sign a form that attests, in part, "I have no actual or potential conflicts of interest in the recommendation and/or approval of the selection of the external investment manager.''

MacKee, the SBA spokesman, was asked if the policy would have changed Williams' role in picking Bayview. No, he said, because Williams had no conflict of interest.

Staff writer Kris Hundley, computer assisted reporting specialist Connie Humburg and researchers Shirl Kennedy and Carolyn Edds contributed to this report. Sydney P. Freedberg can be reached at (727) 893-8217.

Williams: 'Pensioners can rest assured'

Williams declined to be interviewed for this story but responded to written questions.

"I did not introduce Bayview to the SBA ... one full year prior to my arrival, the senior investment group had recommended pursuing investment options in real estate debt funds ... of the nature of the Bayview fund.''

"I categorically did not 'intervene on Bayview's behalf,' " he wrote, he only did his job as chief investment officer. That "includes oversight of the investment process and I did in fact agree with the direction of our professional investment staff at various steps in the Bayview due diligence process.''

He said the overtures Bayview made in January and February 2008 were for ''completely different investments'' than the one that interested him. The company's inability to get a meeting at the SBA for more than a year does not mean the agency wasn't interested. "It is common for a dialog with a potential manager to begin far in advance of a face to face meeting.''

The staff had been tracking Bayview for a year, Williams wrote, and it was only after he arrived that "the financial environment changed dramatically in a way that created substantial opportunity for an investment strategy like the one in the Bayview fund SBA invested in.''

Williams said it's insignificant that Bayview is not registered with the SEC. "A number of top quality investment firms have chosen to be unregistered.''

He said multiple checks and balances in the pension fund investment-selection process would short-circuit any deal that favored friends. And with Bayview, he said, "the SBA followed a multi-step process over the course of several months that included exactly (those) kind of internal and external reviews/checks & balances.''

Florida law does not require that the executive who invests the public's money disclose details about the nature of his hedge fund investments, and Williams has declined to. He previously told the Times he knew of no way he or his former hedge fund employer benefits from a Bayview contract with the state.

He said "pensioners can rest assured,'' the SBA is committed to doing things openly, in the sunshine.

It paid to know Florida's pension fund boss; firm got deal despite red flags. 12/25/10 [Last modified: Monday, December 27, 2010 10:35am]

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