President of Public Fund for NYC Correction Officers Arrested for Bribery

The president allegedly received kickbacks for investing the Correction Officers’ Benevolent Association’s Annuity Fund assets in a hedge fund.

Norman Seabrook, president of Correction Officers’ Benevolent Association (COBA), which provides various retirement benefits for New York City correction officers, has been arrested for demanding and accepting bribes in exchange for investing union money in a New York-based hedge fund, according to the U.S. Attorney’s Office for the Southern District of New York

According to the complaint, Seabrook’s control of the fund includes administration of its “Annuity Fund,” a retirement benefits program funded by the City of New York that invests more than $70 million for correction officers’ retirements. Manhattan U.S. Attorney Preet Bharara said: “As alleged, Norman Seabrook and Murray Huberfeld engaged in a straightforward and explicit bribery scheme. For a Ferragamo bag stuffed with $60,000 in cash, Seabrook allegedly sold himself and his duty to safeguard the retirement funds of his fellow correction officers. Norman Seabrook, as COBA’s president for over two decades, allegedly made decisions about how to invest the nest egg for thousands of hard-working public servants, based not on what was good for them, but on what was good for Norman Seabrook.”

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Huberfeld is a founder and part owner of Platinum Partners, a Manhattan-based hedge fund that principally ran two funds. He was also arrested.

According to the complaint, toward the end of 2013, on a trip to the Dominican Republic with, among others, an individual who is now a cooperating witness for the government, Seabrook told the witness that he worked hard to invest COBA’s money and was not getting anything out of it, and it was time that “Norman Seabrook got paid.” The witness was friendly with and had done business with Huberfeld and was aware that Platinum was looking to attract public and institutional investors. The witness told Huberfeld that Seabrook would likely invest COBA money in Platinum if Huberfeld were willing to pay Seabrook money. Huberfeld agreed to the proposition and worked out a formula in which Seabrook would be paid a kickback of a portion of the profits from COBA’s investment that Huberfeld estimated could be between $100,000 and $150,000 per year.

NEXT: The investments did not perform as well as expected

Seabrook then began investing COBA’s money, at first going through the motions of having Platinum make a pitch to COBA’s Annuity Fund board and having advisers conduct diligence. Those advisers included attorneys who expressed concern that public pensions like COBA do not typically invest in higher-risk vehicles like hedge funds. In March 2014, COBA’s Annuity Fund made a $10 million investment in one of Platinum’s funds. In June 2014—this time without running the investment by the COBA Board or seeking any approval—Seabrook invested $5 million, or 40%, of COBA’s own assets in the same fund. In August 2014, the Annuity Fund invested another $5 million in Platinum. By that point, COBA was the largest investor in that Platinum fund for all of 2014, and amounted to more than half of all incoming investments for the fund. At the same time, the fund was experiencing significant redemptions by other investors.

Toward the end of 2014, Seabrook wanted the first of his kickback payments, and demanded it from the government witness. But, Huberfeld said the fund had not performed as well as expected, and that he could pay Seabrook only $60,000. 

The witness paid Seabrook the first $60,000 kickback on December 11, 2014. Before meeting Seabrook that evening, he went to Salvatore Ferragamo on Fifth Avenue in Manhattan and bought an expensive bag for Seabrook, in which he put the money. Huberfeld continued to lobby Seabrook for more money in 2015. However, after a lawsuit filed by a former COBA board member referred to the Platinum investments, and the U.S. Attorney’s Office grand jury investigation resulted in subpoenas to Platinum and COBA in May 2015, no further investments were made.

Seabrook and Huberfeld face up to 40 years in prison.

A statement on COBA’s Facebook page from Elias Husamudeen, president of COBA, said, "We are saddened and concerned by these allegations, but would point out that Mr. Seabrook is innocent of these charges until proven otherwise.”

DC Retirement Plan Investment Landscape Is Changed

The industry has made much more headway on improving participant portfolio construction, says Jean Young with the Vanguard Center for Retirement Research.

Vanguard’s 2016 How America Saves report shows the number of defined contribution (DC) plan participants with professionally managed allocations—those who have their entire account balance invested in a single target-date or balanced fund or in a managed account advisory service—has grown.

At year-end 2015, about half of all Vanguard participants were solely invested in an automatic investment program—compared with just 29% at the end of 2010. Forty-two percent of all participants were invested in a single target-date fund; another 2% held one other balanced fund; and 4% used a managed account program. Among new plan entrants (participants entering the plan for the first time in 2015), eight in 10 were solely invested in a professionally managed allocation.

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Jean Young, senior research analyst at the Vanguard Center for Retirement Research, and lead author of How America Saves, based in Malvern, Pennsylvania, tells PLANSPONSOR, while automatic enrollment and plan sponsors’ choice of a qualified default investment alternative (QDIA) had something to do with this, the study found more participants chose these options than were defaulted into them. “Just offering the options eases decisions for participants,” she says.

As for the use of managed accounts, Young says the study indicates those who choose managed accounts tend to have higher account balances and be higher-income, longer-tenured employees. “At some point, their balance gets high enough that they want advice and professional investment management,” she notes.

Given the growing focus on plan fees, there is increased interest among plan sponsors in offering a wider range of low-cost passive or index funds. An “index core” is a comprehensive set of low-cost index options that span the global capital markets. In 2015, half (54%) of Vanguard plans offered a set of options providing an index core.

Over the past decade, the number of plans offering an index core has grown by nearly 90%. Because large plans have adopted this approach more quickly, about two-thirds of all Vanguard participants were offered an index core as part of the overall plan investment menu. Factoring in passive target-date funds, 69% of participants hold equity index investments.

“I do think the fee transparency regulations had a lot to do with this,” Young says. “As plan sponsors look at their investment lineups, they want to be sure they have low-cost passive option for participants.”

NEXT: What the markets did to account balances

Young points to scatter plots in the How America Saves report that show the five-year annualized total return for participants in professionally managed options versus those participants who select investments on their own. The scatter plots show consistent allocations to bonds and stocks and consistently rising returns for those in professionally managed accounts. However, the allocations and returns for those selecting their own investments included many outliers, with some experiencing negative returns.

The How America Saves study found that with essentially flat markets in 2015, the average one-year participant total return was –0.4%. Five-year participant total returns averaged 7.3% per year. Among continuous participants—those with a balance at year-end 2010 and 2015—the median account balance rose by 105% over five years, reflecting both the effect of ongoing contributions and strong market returns during this period. More than 90% of continuous participants saw their account balance rise during the five-year period ended December 31, 2015.

Young explains that the returns participants see depends in part on the size of the account balance. The Vanguard study found the median account balance was $26,000; only 25% have account balances higher than average. Young says there are a few things going on. “The effect of auto enrollment is more small balances. For better or worse, participants don’t get the idea of total return and compounding, so they look at what their account balance is doing. In 2015 when equity was down, ongoing contributions masked that, so while participants might hear about market volatility, what they are experiencing in their own account doesn’t reflect that. Smaller account balances are like rose-colored glasses, and the good thing is it doesn’t make participants panic.”

Young says those with higher account balances may see more of a loss in their accounts, which is not necessarily a bad thing because they are buying low with their contributions.

“The two big criticism for 401(k)s is that participants don’t save enough, and don’t know how to invest. We found the overall contribution rate is 10%, which we’d like to see higher, but it is good. We’ve made much more headway on the participant portfolio construction issue. These are the two things we need to get right,” Young concludes.

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