NCCo government's $92M transfer scrutinized

• David Grimaldi changed the firm that handles the county%27s %2492 million in reserves
• County auditor is investigating to determine if all procedures were properly followed
• Grimaldi says previous advisers had money in risky investments
• Grimaldi also says UBS is serving as temporary advisers

The New Castle County auditor is investigating the transfer of $92 million of the county government's reserve accounts to the United Bank of Switzerland shortly after County Executive Tom Gordon took office in November 2012.

The reserves are the county's pots of money in case of emergencies.

Auditor Bob Wasserbach said he's reviewing whether County Council should have voted on the transfer and whether the new contract should have been put out for bid. He's also looking into whether the UBS or companies it replaced violated the county's investment policy.

"I'm not saying any laws were broken," Wasserbach said. "But even if they weren't, $92 million is a lot of money to be transferred without council's knowledge and without a public bid. There might not be legal issues, but there are certainly transparency and best-practice issues."

Wasserbach said he expects to issue his report on the transfer next month.

The transfer was Chief Administrative Officer David Grimaldi's idea. He said he cleared the move with the county law office first. Not only was the transfer legal, it's fiscally sound, he said.

"UBS has saved the county money around $400,000 in fees in two years and has placed the reserve money in less risky investments, which is exactly where you want it," Grimaldi said.

Gordon was first county executive from 1996 to 2004. It was during that time when West Capital Management and Sit Investment advisers were hired to manage portions of the county's investment portfolio, Assistant County Attorney Judith Hildick Mitchell wrote in a letter to Wasserbach last month.

The contract with Sit was terminated in early 2013, Hildick Mitchell wrote. Contracts with West Capital Management, which was a consultant on the two portfolios valued at $92 million and managed a third account on its own, were terminated as well. The contract with Fidelity Investments, which was the custodian for two of the accounts, also was terminated.

The reason, according to Grimaldi and Hildick Mitchell, was that the money was being placed in "less than desirable investment options such as junk bonds and derivatives."

A woman who answered the phone at West Capital's office in Philadelphia declined comment. Mike Brilley, president of Sit Investment advisers in Minnesota, denied the characterization.

"Basically, ourselves, the other manager and an adviser were terminated after an election," Brilley said. "When we managed the portfolio, it had very conservative guidelines. We do not invest in junk bonds and we did not invest in anything that would be called junk."

Brilley said there was never any indication that the county wasn't happy with the services Sit provided.

Grimaldi, however, suggests the investments by the old firms were in violation of the county's investment policy because they were too risky. He said they went unexamined for years.

"I came in and basically did the first audit ever," he said.

Grimaldi, a financial adviser for Morgan Stanley in New York City from 2005 to 2009, said he called one of his Wall Street contacts and was directed to UBS.

The News Journal requested the county's current contract with UBS. Grimaldi said there's no contract, just an open accounting document. The newspaper requested those Friday as well, but the county couldn't immediately provide them.

County documents show that West Capital received $35,000 each in 2011 and 2012 for advisory services. The county paid other firms - including Sit Financial - nearly $194,000 in 2011 and nearly $203,000 in 2012 in investment fees and other costs.

Grimaldi said UBS does not receive investment fees, but has earned about $160,000 since its managed the funds. UBS charged the county .07 percent of the money invested the first year and .1 percent this year to manage the funds, Grimaldi said.

He claims the move to UBS has saved the county $362,000 a year in mutual fund expense fees as well. UBS does not invest any of the reserves into mutual funds, Grimaldi said.

Grimaldi couldn't provide The News Journal with documentation that includes the formula by which UBS is paid by the county, or anything that shows how much it has been paid so far. He prepared a spreadsheet for the first time over the weekend that he says shows how much West Capital and Sit Financial were paid by the county.

Wasserbauch also said he is looking into whether UBS or the previous advisers violated the county's investment policy.

UBS is acting as a temporary manager, Grimaldi said. He said they are charging modest fees to better position themselves to be selected when the county issues a request for proposal for a permanent investment manager.

"They're interim advisers who really want to do a good job," Grimaldi said. "They have performed well and they have charged us basically nothing."

Professional services contracts of more than $50,000 have to be bid, unless they meet a series of exceptions. One of them is for investment advisory services. Wasserbach said he's not sure if the contract with UBS meets that exception, but is reviewing it.

Wasserbach said he's also reviewing a UBS document signed by Gordon on Jan. 30, 2013, that states a quorum of "New Castle County government" was "present and voting" at a meeting on Jan. 24. The document empowers Grimaldi and County Chief Financial Officer Mike Coupe to transfer county stocks and bonds.

Hildick Mitchell's letter to Wasserbach noted that Sit Investment Advisers was hired in October 1999 and West Capital was hired in May 2001 without County Council approval.

Still, some council members aren't happy about the way the issue was handled. Councilman George Smiley first heard about it in November 2013, but not much since.

"There are those of us on council who think we should have had input on it and voted on it," he said. "The administration's answers on this so far haven't sat well with me."

Councilwoman Janet Kilpatrick is so disturbed by the transfer that she has drafted an ordinance to create a new board that would oversee county investments. The ordinance is scheduled to be introduced on Aug. 26.

"I'm upset that this was done without anyone's knowledge and without council being told," Kilpatrick said. "At least there should have been a report about it at one of our Finance Committee meetings. If the move is so great, why not come and tell us about it?"

Grimaldi said he will schedule an update once council resumes its meetings next month.

Contact Adam Taylor at 324-2787 or ataylor@delawareonline.com.

NOTE: This story originally contained incorrect figures for what New Castle County paid various firms. It was updated to reflect the right numbers on Aug. 7, 2014.