Pittsburgh Tribune-Review scorches State’s public pension system over portfolio’s global bad actors’

Last Sunday’s edition of the Pittsburgh Tribune-Review ran a blockbuster expose of the Pennsylvania State Employees’ Retirement System — "one of the nation’s oldest and largest public pension funds" — for causing, according to the article’s opening sentence, "The retirement savings of more than 200,000 Pennsylvanians [to help] enslave Christians in Southern Sudan, build long-range missiles in Iran and smuggle automatic rifles from China to the United States." (Emphasis added.)

Under the headline "Pennsylvania Pensions Bankrolling Violence," Tribune-Review reporter Thomas Olson reveals the ways in which "global bad actors" have been penetrating the Commonwealth’s SERS portfolio thanks to the Retirement System’s woefully inadequate political risk assessment and its over-reliance on the flawed judgment of external fund managers — including, in many cases, representatives of the same Wall Street firms that are responsible for bringing these bad actors’ stock and bond offerings to the U.S. market.

Particularly noteworthy were the profiles of five foreign companies that are allegedly connected to human and labor rights abuses, national security concerns, the persecution of religious freedom and other malevolent activities. The paper notes that one of these — Sinopec (which listed on the NYSE in October of last year) — has recently been alleged to be in violation of US law thanks to its estimated $163 million investment and joint venturing agreements in Iran’s energy sector. By crossing the $20 million triggering threshhold of the Iran-Libya Sanctions Act (ILSA) for energy-related investment in Iran, Sinopec (and, inevitably, its new American shareholders) are now the focus of a State Department investigation, and could be subjected to US sanctions. Such sanctions may be deemed in order due to the fact that the company appears not to have disclosed to investors in its SEC prospectus any intention to conclude contracts with Tehran.

Mr. Olson’s article also makes clear that the Commonwealth’s Treasurer, Barbara Hafer, had been personally alerted to this emerging challenge to the integrity of the Pennsylvania public pension system in January 2000 by the Institute on Religion and Democracy and the Center for Religious Freedom. The Casey Institute is aware, moreover, of congressional warnings to her and every one of her forty-nine counterparts in other states concerning the potential penetration of their respective public pension funds by global bad actors. This warning was transmitted in not one but two letters from Rep. Spencer Bachus (R-AL) and Rep. Dennis Kucinich (D-OH) on August 3, 1999 and November 8, 1999.

The bottom line of the Tribune-Review article and the William J. Casey Institute’s four- year-old Capital Markets Transparency Initiative is the same: State governors, legislators, treasurers, as well as pension fund managers and board members must avoid making in the future the kinds of mistakes that Pennsylvania’s State Employees Retirement System (among others) has made in the past. The insights and warnings in the Pittsburgh Tribune-Review article are to be heeded, lest others in the future qualify for similar harsh scrutiny and criticism.

Pennsylvania pensions bankrolling violence

By Thomas Olson

Pittsburgh Tribune-Review, 21 January 2001

The retirement savings of more than 200,000 Pennsylvanians have helped enslave Christians in Sudan, build long-range missiles in Iran and smuggle automatic rifles from China to the United States. About $100 million of the $30 billion pension fund for state employees is invested in five foreign corporations whose profits benefit regimes with records of human-rights violations, a Pittsburgh Tribune-Review investigation found.

The system covers state workers from janitors to the governor, although teachers have a separate retirement system. James Orloff, 54, of New Castle had no idea his pension money was tainted by bloody business abroad. "I take my retirement money each month, but I never paid attention to where it was coming from," said Orloff, who was a Pennsylvania State Police trooper until 1997. "It seems money and profit are more important than morality," he said.

According those sources, the corporations in question have helped finance:

• Construction of missiles in Iraq and Iran that could hit targets in Israel and Europe.

 

• A 16-year campaign of genocide, including slavery, against Christians in Sudan by the country’s Muslim fundamentalist military government.

 

• Shipment of 2,000 Chinese-made AK-47 automatic rifles to U.S. Customs agents posing as organized-crime figures. The guns were destined for Los Angeles street gangs, according to federal officials.
• A plan to lay off 1 million workers in China to cut costs and improve profit prospects for a 2,500-mile natural gas pipeline. The AFL-CIO labor union said the Chinese government violates core standards of the International Labor Organization because the workers have no right to collective bargaining.

Officials who oversee Pennsylvania’s pension fund declined to discuss the five companies.

Foreign stocks account for nearly $6.5 billion of the state pension investments, according to the fund’s annual report. For instance, the fund holds more than $1 million worth of stock in Sinopec Corp., also known as Sinopec Shanghai Petrochemical.

Sinopec, which is controlled by the Chinese government, is developing oil fields in Iraq. The company also has drilled for oil in Sudan for three years. Both nations have long been on the U.S. State Department’s list of terrorist-sponsoring nations.

The U.S. Commission on International Religious Freedom warned last year that a subsidiary of Sinopec is part of a joint venture to develop oil fields in Sudan. Sinopec issued its first shares on the New York Stock Exchange in October.

"There is highly credible evidence the government of Sudan systemically destroyed villages in areas surrounding the oil fields in order to clear them of human population," according to a United Nations special report released in October 1999.

The state pension fund also owns $706,163 in stock of PetroChina Co., which is building the Chinese gas pipeline. PetroChina, the world’s fifth-largest oil company, is owned by the China National Petroleum Co., which in turn is owned by the Chinese government. China National has a 40 percent stake in a $2 billion project to produce crude oil for Sudan, according to the U.S. House Banking Committee and other sources.

The China National project included construction of a 932-mile pipeline from Sudan to the Red Sea. The pipeline will yield at least $300 million a year in oil revenue for the Sudanese government, according to the U.S. Commission on International Religious Freedom.

The Sudanese government uses money from crude oil to finance the mass murder of Christians, according to the United Nations. "This oil revenue is really important for Sudan’s expansion of their civil war and for the expansion of their military," said Elliott Abrams, assistant secretary of state for human rights during the Reagan administration.

RIFLES AND MISSILES

The state’s pension fund also has bought stock in a company that brought assault rifles to the United States and another that indirectly helps Iran build long-range missiles.

In March 1996, a China Ocean Shipping cargo ship docked in Oakland, Calif. One container held 2,000 AK-47 assault rifles made in China, according to the U.S. Customs Service. Posing as mobsters, Customs agents bought the automatic rifles from China Ocean workers and later arrested the suspects.

China Ocean, also known as Cosco, has been identified as an arm of the Chinese military by the U.S. House Task Force on Terrorism and Unconventional Warfare. Pennsylvania’s pension fund held about $1.4 million of stock in Cosco Pacific, a Cosco subsidiary, as of Dec. 15.

But the state’s biggest foreign holding is Total Fina Elf: The stake in the company was worth more than $78 million as of January 2000, according to the pension fund’s annual report. Total Fina leads a consortium that is finishing a $2 billion contract to develop offshore natural gas fields for Iran, according to the William J. Casey Institute of the Center for Security Policy, a Washington think tank founded by former Reagan administration officials. The Iranian government is spending money from the gas sales on long- range missiles capable of reaching Israel and Europe, said Roger Robinson Jr., chairman of the institute. Total Fina also has extended its oil reach into Sudan, according to the British Broadcasting Corp. Last month, the French company signed an oil-development pact with the military government.

"Some investors will say, `I don’t care’ or `It’s too complicated’ or `It’s just a small percentage of the fund,’" Abrams said. "You may find a state pension or a university fund has a small percentage invested in stocks that do business in Sudan, and they may have the information and do nothing about it. "But there are other Americans who don’t want a fraction of a cent supporting slavery and repression and other grave human rights violations."

A BALANCING ACT

About four years ago, foreign corporations such as Sinopec and Total Fina began tapping an enormous U.S. money pipeline filled largely with vast pension holdings. U.S. workers own about $430 billion in foreign stocks through their pension funds, the AFL-CIO estimates. In addition, the nation’s record-breaking economic expansion has pushed mutual-fund holdings into the trillions.

Since 1980, corporations controlled by the People’s Republic of China have raised about $13.5 billion from the sale of bonds in the United States, according to a House select committee chaired by U.S. Rep. Christopher Cox, a California Republican.

WARNING THE STATE

State pension officials have been warned about questionable investments, even though most of the investment decisions are entrusted to Wall Street gurus. State Treasurer Barbara Hafer, who sits on the state pension board, and pension fund Executive Director John Brosius were among dozens of officials nationwide to receive a plea in January 2000 from the Institute on Religion & Democracy and the Center for Religious Freedom.

The two public-interest groups outlined how investments in foreign corporations had fanned mass murder in Sudan. The letter urged pension authorities in Pennsylvania and other states to sell such stocks or avoid buying them. "To do otherwise would cause your pension fund to help underwrite the world’s most egregious practitioner of terrorism, deliberate starvation, religious persecution, slavery and literal genocide," the letter stated. The letter was signed by Nina Shea of the U.S. Commission on International Religious Freedom and leaders of seven other U.S. religious organizations.

No trustees called for boycotts of such investments, said Gilbert, the Pennsylvania pension fund’s chief investment officer. That includes Hafer, who has opposed investment in domestic corporations that produce tobacco products, liquor and some rap music, said state Treasury spokesman Steve Schell.

TRACKING GLOBAL FUNDS

Like most retirement systems, Pennsylvania’s hires advisers and money managers to invest the pension money in mutual funds. But lurking inside the pension’s global funds are so-called "red chips." These corporations are controlled by the People’s Republic of China and are registered on stock exchanges in Hong Kong, New York and London.

Several red chips conducted multibillion-dollar public stock offerings in recent years. As with most U.S. companies that go public, the stock first is bought by an investment bank, such as the Goldman Sachs Group Inc. in New York. The investment bank then quickly resells the stock, at a reasonable markup, to the public – mostly to mutual funds and pension funds. Given the mountain of money involved, it takes powerful players to assemble such stock offerings and sell them.

Such an offering from one red chip almost was torpedoed by controversy in April. The $2.89 billion PetroChina stock offering on the New York Stock Exchange was underwritten by Goldman Sachs, the world’s most powerful investment banker. In 1998, Goldman also underwrote a $1 billion bond offering by the People’s Republic of China. The PetroChina offering barely got off the ground.

Too few Goldman Sachs investors were interested in buying the $10 billion stock. Some of the world’s largest oil companies salvaged the deal. BP Amoco Plc, ExxonMobil Corp. and Shell Overseas Investments all bought major stakes, according to the Casey Institute.

THE ‘PENSION POLICE’

PetroChina’s foreign ties and track record brought together an unlikely collection of forces to oppose its initial public offering. The so-called PetroChina Coalition consisted of right- and left- leaning groups that fight for human rights, religious freedom, fair labor practices and U.S. national security.

The PetroChina Coalition sent letters to more than 200 pension systems, including Pennsylvania’s. Coalition members also wrote to the heads of the New York Stock Exchange and the federal Securities and Exchange Commission. More than 180 religious leaders, joined by several former Cabinet members, urged the White House to halt the deal.

But it didn’t happen. By mid-October, PetroChina and Sinopec had raised about $6.3 billion on the U.S. stock market.