Is Your Pension Fund Plundering Puerto Rico?

Ethan Corey

While inves­ti­gat­ing the hold­ers of Puer­to Rico’s $74 bil­lion in pub­lic debt, In These Times stum­bled across a hid­den con­flict: State and local pen­sion funds across the rest of the Unit­ed States are com­plic­it in a bid to drain mon­ey from Puer­to Rico’s pen­sion funds.

Long before Puer­to Rico was dev­as­tat­ed by two hur­ri­canes, it was already drown­ing in debt and mired in the worst pen­sion cri­sis in the nation. In 2008, the Employ­ee Retire­ment Sys­tem (ERS), which serves the island’s pub­lic-sec­tor retirees, faced a $15 bil­lion bud­get short­fall. To pro­vide the sys­tem with much-need­ed cash, ERS issued just over $3 bil­lion in bonds backed by future employ­er con­tri­bu­tions to ERS, mean­ing that bond­hold­ers could take those con­tri­bu­tions if ERS failed to make its inter­est payments.

At first, only res­i­dents of Puer­to Rico could pur­chase the bonds, which were pack­aged by mutu­al funds like UBS and San­tander and sold to Puer­to Ricans sav­ing mon­ey for col­lege and retire­ment. By 2014, how­ev­er, ERS was near­ly out of mon­ey, and the val­ue of the bonds plum­met­ed, lead­ing to a mas­sive sell-off.

The bonds were scooped up by so-called vul­ture funds (also known as dis­tressed debt funds”) — hedge funds that act like sophis­ti­cat­ed col­lec­tions agen­cies, buy­ing tox­ic debt at a steep dis­count and pur­su­ing debtors both in and out of court to recoup their invest­ment. Vul­ture funds often resort to strong-arm tac­tics to ensure repay­ment. In one infa­mous case, a vul­ture fund seized an Argen­tine naval frigate, hold­ing the ship and its crew for ran­som until Argenti­na made a $20 mil­lion debt payment. 

Mean­while, Puer­to Rican retirees were suf­fer­ing under an aus­ter­i­ty régime. In 2016, Con­gress estab­lished a fis­cal over­sight board to take con­trol of the island’s finances, and in March 2017, the board cut pen­sion ben­e­fits by 10 per­cent. Even then, it was unclear whether the fund would remain sol­vent; retirees’ futures were uncertain.

With the pen­sion fund dry­ing up, the vul­ture funds that now own one-third of the pen­sion system’s debt want­ed to be first in line to get paid. In July 2017, eight of the funds filed a com­plaint in fed­er­al bank­rupt­cy court, request­ing that ERS divert employ­er con­tri­bu­tions to repay bond­hold­ers, putting retirees at risk of even steep­er cuts. In their fil­ing, the funds com­plained that pen­sion ben­e­fi­cia­ries will receive 90 per­cent of the amount they are owed while ERS Bond­hold­ers will receive pen­nies on the dollar.”

But raid­ing pen­sion funds isn’t the only way vul­ture funds make mon­ey off of the Unit­ed States’ $27-tril­lion retire­ment-sav­ings indus­try. In fact, many of the vul­ture funds in the ERS case count munic­i­pal and state pen­sion sys­tems among their largest clients. Using pub­licly avail­able doc­u­ments, In These Times iden­ti­fied more than two dozen of these pen­sion sys­tems. Pub­lic employ­ees from Ore­gon to Wis­con­sin to Cal­i­for­nia find them­selves com­plic­it in a suit to take away pen­sion pay­ments from Puer­to Rico’s retired teach­ers, fire­fight­ers and oth­er pub­lic workers.


The largest vul­ture fund in the ERS case, Oak­tree Cap­i­tal Man­age­ment, over­sees near­ly $24 bil­lion on behalf of pub­lic pen­sion funds, and its clients include 75 of the 100 largest pen­sion sys­tems in the Unit­ed States, at least 12 of which are direct­ly invest­ed in ERS bonds. Oak­tree is claim­ing own­er­ship of more than $410 mil­lion in ERS bonds, across sev­en funds.

Some of the largest pen­sions invest­ed in Oaktree’s Puer­to Rico-relat­ed funds include the Wash­ing­ton State Board of Invest­ment, which has $600 mil­lion invest­ed across two Oak­tree funds; the North Car­oli­na Retire­ment Sys­tem, which has invest­ed $190 mil­lion; the Mass­a­chu­setts Pen­sion Reserves Invest­ment Man­age­ment Board, with $175 mil­lion invest­ed; and the Ore­gon Pub­lic Employ­ees Retire­ment Sys­tems, with $125 mil­lion invested.

The iden­ti­ties of the sec­ond and third-largest vul­ture funds in the ERS case ini­tial­ly proved a mys­tery. List­ed in court fil­ings as SV Cred­it” and Ocher Rose,” respec­tive­ly, their names and address­es appeared in the ERS bank­rupt­cy doc­u­ments and vir­tu­al­ly nowhere else. Nei­ther the SEC nor the Munic­i­pal Secu­ri­ties Rule­mak­ing Board (MSRB) have any record of either firm’s exis­tence, and the address­es pro­vid­ed in court doc­u­ments trace back to so-called cor­po­rate-ser­vices com­pa­nies, which serve as front­men for cor­po­rate enti­ties wish­ing to keep their iden­ti­ties under wraps.

For­tu­nate­ly, both firms are required to file cer­tifi­cates of incor­po­ra­tion with the Delaware Divi­sion of Cor­po­ra­tions, where both SV Cred­it and Ocher Rose are incor­po­rat­ed. These doc­u­ments pro­vide lim­it­ed infor­ma­tion about each com­pa­ny, but it was enough for In These Times to track down their par­ent entities.

In the case of SV Cred­it, which owns near­ly $390 mil­lion in ERS bonds, the firm’s cor­po­rate char­ter revealed a tan­gle of shell com­pa­nies that all led back to one place: Cen­ter­bridge Part­ners, a hedge fund and pri­vate equi­ty firm based in New York City.

The firm is run by two pow­er­ful financiers, Jeff Aron­son and Mark Gal­lo­gly, who are also promi­nent phil­an­thropists and polit­i­cal donors. In 2009, Gal­lo­gly served on Pres­i­dent Obama’s Eco­nom­ic Recov­ery Advi­so­ry Board tasked with guid­ing the administration’s response to the finan­cial crisis.

Cen­ter­bridge has more than $25 bil­lion in assets under man­age­ment, about $4.2 bil­lion of which is invest­ed in Cen­ter­bridge Spe­cial Cred­it Part­ners III (CSCP III), the fund that owns SV Cred­it. Pub­lic pen­sions have invest­ed at least $987 mil­lion in CSCP III, more than half of which comes from just one pen­sion fund alone: the Ore­gon Pub­lic Employ­ees Retire­ment Fund, which man­ages more than $70 bil­lion on behalf of Oregon’s rough­ly 400,000 cur­rent and retired pub­lic employees.

Ocher Rose was even more dif­fi­cult to iden­ti­fy. Because it is reg­is­tered as a lim­it­ed lia­bil­i­ty com­pa­ny, its cor­po­rate char­ter only includes the name of the firm’s autho­rized sig­na­to­ry, a per­son with the author­i­ty to sign legal doc­u­ments on the company’s behalf. Through a pub­lic records search, In These Times found a pos­si­ble match for the autho­rized signatory’s iden­ti­ty: a legal admin­is­tra­tor work­ing for King Street Cap­i­tal, anoth­er hedge fund based in New York City. Through its pub­lic rela­tions rep­re­sen­ta­tive, King Street con­firmed that it owned Ocher Rose.

King Street, which claims $197 mil­lion in ERS bonds, oper­ates a $12 bil­lion vul­ture fund, which indus­try pub­li­ca­tion Hedge Fund Insight once called the dad­dy of dis­tressed funds.” The fund invests at least $499 mil­lion on behalf of pub­lic pen­sions, near­ly half of it from the New York State and Local Retire­ment System.

Sev­er­al of the oth­er vul­ture funds in the ERS case have count­ed pub­lic pen­sions among their clients, both past and present. Glen­don Cap­i­tal Man­age­ment, for exam­ple, has at least four pub­lic pen­sions invest­ed in its Glen­don Oppor­tu­ni­ties Fund, a Cay­man Islands-based dis­tressed debt fund claim­ing $33.7 mil­lion in ERS bonds. Mason Cap­i­tal, which owns $141 mil­lion in ERS bonds, pre­vi­ous­ly man­aged invest­ments on behalf of both Flori­da and Rhode Island’s retire­ment sys­tems, but both pen­sions pulled out due to poor returns.


The extent to which pen­sion sys­tems invest­ed in these vul­ture funds were aware of their involve­ment in the ERS bank­rupt­cy is unclear. When In These Times con­tact­ed the sev­en pen­sion funds with the largest invest­ments in the ERS case, all sev­en either denied respon­si­bil­i­ty for the vul­ture funds’ actions or declined to comment.

Only one of the sev­en, the Flori­da State Board of Admin­is­tra­tion (SBA), which has $200 mil­lion invest­ed with King Street, indi­cat­ed that they knew about their involve­ment in the ERS case. In a state­ment, their spokesper­son said, We are aware of our partner’s invest­ments,” but added, As with any lim­it­ed part­ner in any fund, the SBA does not engage in any day-to-day man­age­ment issues or deci­sions of a fund; and as a fidu­cia­ry, I am sure you under­stand the SBA would not com­ment one way or anoth­er on a manager’s actions.”

Asked if they endorsed the vul­ture funds’ efforts to demand pay­ment from ERS, none of the sev­en pen­sion sys­tems explic­it­ly con­demned efforts to divert Puer­to Rican pub­lic work­ers’ retire­ment funds to pay off Wall Street bonds.

In a 2016 meet­ing with the Ore­gon Invest­ment Coun­cil, which has $625 mil­lion invest­ed in vul­ture funds involved in the ERS case, Cen­ter­bridge co-founder Jef­frey Aron­son did not men­tion Puer­to Rico or ERS direct­ly, but he empha­sized that Centerbridge’s invest­ment strat­e­gy involves fight­ing to claim the largest pos­si­ble share of debtors’ assets, even if oth­er stake­hold­ers are left with crumbs.

What we look to do in each of our invest­ments is to tar­get a par­tic­u­lar class of debt and pur­chase enough of that debt so that we can be at the nego­ti­at­ing table to deter­mine, keep­ing in mind the pie metaphor, how the pie will be sliced, to make sure we get the largest piece pos­si­ble,” Aron­son said.

The Ore­gon Invest­ment Coun­cil vot­ed unan­i­mous­ly to invest $500 mil­lion in Cen­ter­bridge Spe­cial Cred­it Part­ners III.


The invest­ment man­agers who over­see pub­lic pen­sions may not be con­cerned by the vul­ture funds’ behav­ior, but many of the work­ers whose retire­ment funds they man­age do not feel the same way. The Illi­nois Fed­er­a­tion of Teach­ers (IFT), whose mem­bers belong to the Illi­nois Teach­ers’ Retire­ment Sys­tem, which invest­ed $100 mil­lion in Oaktree’s ERS-relat­ed fund, said in a state­ment that they were unaware of the invest­ment and would not sup­port divert­ing pen­sion ben­e­fits owed to retirees to pay off invest­ment expens­es.” IFT is an affil­i­ate of the Amer­i­can Fed­er­a­tion of Teach­ers, which rep­re­sents teach­ers in Puer­to Rico and has cam­paigned against cuts in their pen­sion benefits.

Oth­ers have set their tar­gets on end­ing pub­lic pen­sions’ involve­ment with vul­tures and oth­er hedge funds alto­geth­er. Hedge Clip­pers is a nation­wide coali­tion of unions and grass­roots orga­ni­za­tions that seeks to expose how hedge funds and bil­lion­aires influ­ence gov­ern­ment and pol­i­tics in order to expand their wealth, pow­er and influence.”

In 2016, Hedge Clip­pers suc­cess­ful­ly pushed the New York City Employ­ee Retire­ment Sys­tem, the largest pen­sion fund for munic­i­pal employ­ees in the Unit­ed States, to pull its invest­ments from hedge funds. It became the sec­ond major pen­sion fund to do so join­ing the Cal­i­for­nia Pub­lic Employ­ee Retire­ment Sys­tem, which divest­ed from hedge funds in 2014.

Hedge Clip­pers coali­tion mem­bers include the New York State Unit­ed Teach­ers, the Com­mu­ni­ca­tions Work­ers of Amer­i­ca and the Amer­i­can Fed­er­a­tion of Teach­ers, all of which rep­re­sent pub­lic sec­tor employ­ees whose pen­sion funds are invest­ed in ERS.

In These Times con­tact­ed AFT and CWA for com­ment on the ERS case, as well as sev­er­al state affil­i­ates rep­re­sent­ing work­ers cov­ered by pen­sion sys­tems invest­ed in the ERS vul­ture funds. Many of the state affil­i­ates were unable to reply by dead­line, the Cal­i­for­nia Fed­er­a­tion of Teach­ers, many of whose mem­bers belong to the Cal­i­for­nia State Teach­ers Retire­ment Sys­tem (Cal­STRS), which has $125 mil­lion invest­ed in Cen­ter­bridge Spe­cial Cred­it Part­ners III, wrote:

We encour­age the Cal­STRS board to review their Envi­ron­men­tal, Social and Gov­ern­ment poli­cies to find out if this hedge fund is con­sis­tent with those val­ues that they have. If Cal­STRS does choose to divest from this hedge fund, it should be done in a mea­sured and order­ly process for a smooth transition.

A spokesper­son for Cal­STRS con­firmed the pen­sion sys­tem’s invest­ment with Centerbridge.

Both CWA and AFT’s nation­als did not com­ment on the ERS case specif­i­cal­ly but voiced con­cerns about hedge funds. CWA Com­mu­ni­ca­tions Direc­tor Can­dice John­son wrote, CWA oppos­es the invest­ment of a grow­ing per­cent­age of pub­lic work­er pen­sions invest­ed in hedge funds.” She also not­ed that in New Jer­sey, where the Pub­lic Employ­ee Retire­ment Sys­tem has a $100 mil­lion invest­ment in Glen­don Oppor­tu­ni­ties Fund, CWA and oth­er unions rep­re­sent­ing New Jer­sey pub­lic work­ers have pushed for lim­its on the amount of funds that can be invest­ed in hedge funds, point­ing out that this would save the pen­sion plan hun­dreds of mil­lions of dol­lars that now are wast­ed on fees and oth­er costs.”

AFT Pres­i­dent Ran­di Wein­garten — who cur­rent­ly rep­re­sents Puer­to Rican teach­ers in the Title III bank­rupt­cy pro­ceed­ings, although she was not com­ment­ing in that capac­i­ty — con­demned hedge funds that threat­en the liveli­hoods of work­ers in Puer­to Rico.”

We will con­tin­ue to fight to rebuild a vibrant Puer­to Rican econ­o­my and pro­vide checks and bal­ances on bad actors who, with­out scruti­ny, would line their pock­ets to the detri­ment of Amer­i­can work­ers and retirees — on both the Island and the main­land,” Wein­garten wrote in an email. On the issue of pen­sion fund man­age­ment, she cau­tioned, If trustees choose to invest in hedge funds, they must care­ful­ly ana­lyze costs, but also ensure work­ers’ inter­ests are not being erod­ed to reap unjust and unearned profits.”

Julio López Varona, who helped orga­nize the hedge fund divest­ment effort in New York City, says that divest­ment is the right deci­sion, both moral­ly and eco­nom­i­cal­ly. Hedge funds charge exor­bi­tant fees, often amount­ing to 20 per­cent of invest­ment prof­its, plus a 2 per­cent man­age­ment fee, and their invest­ment returns are mixed at best. In fact, many of the vul­ture funds involved in the ERS case have under­per­formed the mar­ket. Oaktree’s Oppor­tu­ni­ty Fund IX, for instance, has yield­ed aver­age returns of just 2 per­cent since its incep­tion in 2013, while King Street has done only slight­ly bet­ter, with a 4.4 per­cent aver­age annu­al return since 2011. The aver­age annu­al return for stocks in the S&P 500 over that peri­od was 12.3 percent.

López Varona, who grew up in Puer­to Rico and whose moth­er receives a pen­sion through ERS, says that there’s no jus­ti­fi­ca­tion for pen­sion sys­tems to remain invest­ed in vul­ture funds. There are oth­er options, and those options are fea­si­ble, and peo­ple can still make mon­ey for their pen­sions with­out hurt­ing their fam­i­lies back home.”

A con­densed ver­sion of this arti­cle appeared in the Feb­ru­ary 2018 print edition.

This sto­ry was sup­port­ed by the Leonard C. Good­man Insti­tute for Inves­tiga­tive Reporting.

Sean Davis con­tributed fact-check­ing and research assistance.

ETHAN COREY is a New York-based reporter writ­ing about pol­i­tics, social move­ments and inequality.

Ethan Corey is a writer and researcher based in New York. His work has appeared in The Nation, Rolling Stone and MEL magazine.
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