by Max Brantley
Beebe tells Channel 4:
* Audit allegations don't look good.
* He wants to know more.
* He's not calling on her to resign.
* He awaits an expanded look at the matter by Legislative Audit.
I talked briefly with Shoffner yesterday. No, she's not resigning. She acknowledges an error in not attending last Friday's audit committee meeting. (Boy, howdy.) She didn't think her presence was required, with aides prepared to testify. She says the audit made sound advice (on liquidity, for example) and she intends to follow the suggestions. She's still not ready to answer the question of how it came to be that bonds were sold before call dates on 12 occasions, transactions that the auditors figured cost the state $58,000 in potential earnings. She continues to insist that her office reached investment decisions collectively (her chief investment officer, in seeking whistleblower status, disputed that.) She says the state needs law changes to broaden the investment possibilities for funds she manages. "I'm going to work through this where it will be better for everybody."
I'm going to use this opportunity to pass along two separate messages from securities industry professionals. Like everybody else, they note a decidedly unpleasant smell. But they suggest we have more to learn. They sound a bit like Beebe, you might say.
... you had no problem identifying the report prepared by the Division of Legislative Audit as being pretty worthless. In my opinion, it was riddled with inaccurate statements of fact and comparisons of investment strategies and results that were simply not comparable. There are good bond swaps and there are bad bond swaps. Each swap is judged on the basis of the assumptions made at the time. In our business, yields must be quoted on a "yield to worst" basis. If a bond is trading above par, you have to assume that it will be called.
One might speculate a what-if scenario of future results if a bond does not get called, but if it is currently trading at a price above par, the market is making the assumption for you that it will be called. As such, the argument about an "economic loss" is merely problematic. It is possible that the market was wrong and the bond didn't get called. One has to start with certain assumptions. If reality proves to be different, then the swap may not be good. From the report, it is impossible to determine if any of the swaps were good or bad. I would also note that the information provided by St. Bernard was also not sufficient to determine if the swap was a good investment. Taking a profit today does not necessarily mean that the client ended up with more dollars at the end of the period in which you are dealing with.
As best I can tell, nobody has provided the kind of information necessary to determine if the investment practices were good or bad. I appreciate the fact that you have kept an open mind and have pointed out that there have been few decent answers provided by any of the involved parties. Keep plugging away, and we may eventually get enough pertinent facts to understand what, if any, problems exist. I suspect that there are things that could be done much better than they are currently being done, but if the Committee relies on "garbage in", the best we can expect is "garbage out". I wonder if we should ever expect much more from our Legislature.
Your recent blog/article on Ms. Shofner is on the surface accurate. And that is the problem, you should/have to visit with securities traders, other procurers of bonds for city and states to see how possibly grievous this matter may become. By 20 years of experience in the securities business and a impartial reader with no axe to grind, St Bernard Financial is a very small firm, incapable of winning that much business - their website does not disclose whether they are self clearing, who carries their accounts and how they buy and sell securities, further casting doubt on their abilities to win that much business. If she is selling bonds she is probably supposed to get 3 prices for checks and balances. No Broker can command that much percentage of the business without some agreement (soft-dollar, perks, favoritism, etc.) in place and neglecting the common practice of getting a "cover" bid. There are systems in place (I believe its called Trace) that records all prices within 15 minutes of the transaction to allow the "street" to see where paper is trading to keep everyone on "market." It would be hard to chase that info down, but St. Bernard would not be able to provide it unless they are a broker dealer. She also has a fiduciary obligation to the State that appears to be abused- a serious infraction to the people of the State of Arkansas.
This is an ugly situation and the lady who asked for protection has every right to do so. She knows exactly what is going on.....and she is scared to lose her job. Probably, she has been quiet out of fear that she would lose her job due to her participation. The securities industry is laughing at this story- it is too obviously crazy to be legit.