(GE City of Seattle Seattle City Employees? Retirement System 720 Third Avenue, Suite 1000, 10 'Floor, Seattle, Washington 98104-1829, Telephone: (206) 386-1293, Fax: (206) 336-1506 Cecelia M. Carter, Executive Director MEMORANDUM TO: Melvin Robertson, Assistant Executive Director CIO FROM: Cecelia M. Carter, Executive Director wit-- DATE: Wednesday, June 4, 2008 RE: Investigation Regarding Pattern of Disregarding Directions The purpose of this memorandum is to notify you that I have concerns about your ability to perform as the assistant executive director (chief investment of?cer) of SCERS and give you an opportunity to respond to' those concerns. The conduct that I have observed on your part over the past ?ve months raises questions about your judgment, willingness to follow directions, and candor toward me and the Board. Given the large amounts of money entrusted to our care, this pattern of behavior raises real issues for me regarding whether you should continue in this position. Here are some of the incidents and situations Ihave observed: Imperium Renewables, LLC At an April SCERS Investment Committee (the ?Committee?) meeting the Committee agreed to have staff (and by staff it was determined it would be you) verbally communicate with the Company, intention to explore a reclassi?cation of the securities pending proper due diligence and that nothing would be addressed in writing to the Company at that point. Later that very afternoon, you circulated an e-mail to Committee members with a letter from SCERS and in the e?mail you stated: have attached a letter that has been revised by counsel intending to reflect the Spirit of our meeting today. Is the Committee comfortable going forward with the attached letter that would express our interest pending completion of the due diligence process?? What was more troubling was that you solicited the services of legal counsel that was not present at the morning meeting who would have not been aware that the Committee had instructed all communication be verbal and nothing in writing. This caused me to counter your e-mail and instruct that nothing was to be delivered in writing until further notice. At a Special Meeting of the SCERS Investment Committee held Wednesday, May 14, 2008, a motion was voted and passed whereby the Executive Director was authorized to execute the necessary documents to go forth with transactions outlined regarding Imperium Renewables, LLC (the ??Company?). It was further motioned that any changes to the structure of the deal would be reviewed by the Executive Director and at the Executive Director?s discretion it would be decided whether to press forward or call another meeting of the Committee. At the conclusion of that meeting I personally shared my mobile telephone number with Alan Smith, Esq. (outside counsel hired to monitor the Imperium deal) knowing I was traveling over the next four business days and shared with him that I would be accessible by mobile and e-mail. This was done with you still at the table. Despite the speci?c direction that I, as Executive Director, was to execute the necessary documents, on Thursday afternoon I logged onto e-mail to discover that you had taken all necessary execution pages and executed same as ?Assistant Executive Director Although you submitted the caveat in your e?mail to Mr. Smith to await approval from me; this action demonstrates your disregard for the Committee?s motion and/or the authority of the Executive Director. This disregard for my authority was again demonstrated the following afternoon (Friday, May 16, 2008) when I logged onto e-mail to ?nd you had taken my electronic signature (which was provided for purposes of systemic generated retirement letters used by staff) and af?xed it to the treasury wiring instructions to move $3,000,000.00 from SCERS to Imperium on Monday, May 19, 2008. I never authorized the use of my electronic signature for this purpose. I immediately countered your e-mail and informed all involved not to transfer money until further notice from me. I am concerned that had I not logged on Friday afternoon, these funds could have gone out ?rst thing Monday morning. - As it turns out; the transactions are still under negotiations (the new deadline now June 4, 2008) and as of June 2, 2008 the execution pages have not been released from our attorney to the Company and the funds have not been called for by the Company. Additionally, we have been updated that there is a possible Chapter 7 bankruptcy seriously pending. Your premature actions clearly indicates a lack of patience and understanding of business and contract negotiations on your part something an assistant executive director (CIO) [and someone who is a would be expected to be familiar with. If the transfer had gone through, there would have been $3 million additional dollars of pension funds tied up in bankruptcy. Your misjudgrnents in your position can have severe consequences. The retirement system cannot afford to have someone at your level taking such risks. The action of af?xing my electronic signature to a wire authorization form without ?rst getting authorization from me is also extremely troubling given your position of trust. Had you called me or even emailed me to ask me how to proceed, it would have demonstrated the professionalism and judgment I expect for this position. Instead, these City Employees? Retirement System, 720 Third Avenue, Suite 1000, Floor, Seattle, WA 98l04-1829 Tel: (206) 386-1292, Fax: (206) 386-1506 An equal employment opportunity af?rmative action employer. Accommodations for people with disabilities provided. two actions collectively could be interpreted as attempts to undermine my authority and potentially intentional disregard of directives from myself and the Board. When we talked about this and other matters on May 28th and I asked you to explain your actions, your response was: (1) ?they [Imperium] needed the documents signed that Friday; and regarding the wiring instructions, (2) ?the authorization forms need two signatures.? These responses cause me to ask: who?s driving the ship and do you understand who should be leading the process of this transaction? It is my understanding the deal was delayed due to other Series investors not giving into the pressures of Imperium to act hastily. I am particularly uncomfortable with how you have seemed to push investment in Imperium, even when the Board and I have wanted to take a more deliberate approach. I would like you to more clearly explain the reasons for your actions. Iview them as part of a pattern that could result in discipline. Investment Activity Reporting to the Board Questions raised at the April and May Board meetings gave me reason to investigate the SCERS Investment Summary Report you develop and present to the Board on a basis in more detail. My ?ndings raise serious questions about the accuracy and completeness of your reports to the Board and the need to provide transparency from a public entity such as SCERS. Examples are the following: Misrepresentation of Investment Managers Vehicles From January 2008 through May 2008 (investment reporting period November 2007 March 2008) you submitted reports to me and the Board indicating some eight money managers Boston Company, Wellington, etc.] were active managers managing SCERS funds. In reality these managers were terminated and the funds were being invested in at your discretion and direction. The November 2007 Board minutes indicate the Board voted to terminate ING as a money manager. Given the process of terminating a manager, I can only presume said termination ?nalized in December 2007. I state this because a review of the January 2008 Bank of New York Mellon statement (account number 000828788) shows no individual stock holdings in the account and on January 23, 2008 a trade date for 131,000 units of SPDR TR UTS DEPOS RECPTS (CUSIP 78462F 103) for approximately $17 million dollars. Nevertheless ING remained listed on Board reports as a money manager. City Employees? Retirement System, 720 Third Avenue, Suite 1000, 10?" Floor, Seattle, WA 98104-1829 Tel: (206) 386-1292, Fax: (206) 386-1506 An equal employment opportunity af?rmative action employer. Accommodations for people with disabilities provided. Bear Stems Plus At the August 2007 meeting of the Board of Administration the minutes re?ect the Board voted to terminate the relationship with Bear Stems (given performance and management changes). However, in January 2008 when I arrived I began receiving Investment Summary Reports re?ecting Bear Stems as a manager of two asset classes for SCERS. The recent demise of Bear Stems further caused and raised question as to what truly was our relationship with Bear Stems. I even inquired whether you had investigated our securities lending program to ensure Bear Stems did not have securities on loan from SCERS or that our program was not heavily embedded with Bear Stems. Your puzzled response to my questioning led me to believe you had not been monitoring our securities lending program and thus did not know whether we were embedded with Bear Stems through securities lending. Additionally, and more importantly, you continued to report to me and the Board investment activity through two accounts titled Bear Stems. Now, after detailed investigation, I discover these accounts also are a re?ection of your discretionary buying and selling The January 2008 statement for Bank of New York Mellon account number 000828785 details almost $50 million dollars in trading activity in SPDR TR UTS DEPOS RECPTS (CUSIP 78462F103). It wasn?t until our one on one meeting on May 28, 2008 that these accounts were fully explained and thus I instructed you to move all transition account funds into index funds with apprOpriate managers. These are just two examples of mis-representing the investment activity to me and the Board of Administration. Again, so as better come to understand your position behind your actions, please explain your reasons for not re-investing the funds with other managers or at the very least raising the issue with the Board. Additionally, please explain the continuation to re?ect activity on the investment summary report as if active managers were still holding the ?duciary responsibility for the funds. MKA At the January 2008 meeting of the Board of Administration you mentioned in passing to the Board that MKA had failed to provide SCERS with audited ?nancials for the calendar year ending December 2006 [said report should have been due sometime around April 2007 according to the investment agreement]. After the meeting, I made further inquiries with the Board members and I was informed that January 2008 was the ?rst time they had learned of delinquent ?lings. Further research indicates that at the June 2007 Board meeting the question of failed 2006 audited ?nancials was not raised and you made a request of the Board to move an additional $8 million dollars into MKA (which was authorized). City Employees? Retirement System, 1?20 Third Avenue, Suite 1000, 10'll Floor, Seattle, WA 98104-1829 Tel: (206) 386-1292, Fax: (206) 386-1506 An equal employment opportunity af?rmative action employer. Accommodations for people with disabilities provided. Now here we are in May 2008 and MKA has failed to provide the 2006 audited ?nancials as well as the 2007 audited ?nancials. To continue to invest funds with a manager negligent in providing reporting documents appears to go against a rudimentary standard of prudent investing. Please explain your recommendation to increase funding to this manager given the nature of this manager?s investment activity and the impending credit crisis and real estate meltdown that was beginning to raise its ugly head mid-2007. 2008 Performance A review of the 1St 2008 Fund performance further raises questions in that for the 15'1 quarter of 2008 SCERS loss 5.2% against our policy benchmark which loss The question arises - had the funds been invested according to policy (and invested with a manager), could there have been a savings of 50 basis points against the loss? (approximately $11 million dollars) Another observation with regard to the l5t 2008 performance is a disregard for maintaining the portfolio within investment policy percentage allocation. fluctuations in market value certainly explain slight variances over and under policy allocation targets; however, consecutive months where the variance is 2 or more percentage points over or under policy demonstrates a disregard for policy. Again, I ask that you explain your positioning of the portfolio. 2007Audit of Financial Statements From the 2007 audit of ?nancial statements, the auditors raised a concern regarding rigorous documentation of control processes and procedures governing alternative investments ie valuation, frequency, monitoring of at?risk holdings? Your apparent attraction to alternative investments (currently 6.82% verses 5% policy for alternatives and 14.19% verses 12% policy for real estate) demonstrates a lack of understanding as to what is necessary to maintain an aggressive portfolio invested in such investment vehicles. This is why the use of professional managers is paramount. This department does not have the expertise on staff to stay abreast of such market conditions and act prudently and swiftly accordingly. Again, this is another demonstration of your inability to perform and acknowledge limitations and delegate. Inability to Supervise By my observations, you have demonstrated an inability to delegate and thus appear to want to keep and control even of the most rudimentary functions of this department. In January you raised the question of ?lling the ?nancial analyst position and to date the position has not been ?lled or candidates interviewed. This would have shown leadership and management skills complimentary to an assistant executive director. City Employees? Retirement System, 720 Third Avenue, Suite 1000, Floor, Seattle, WA 98104-1829 Tel: (206) 386-1292, Fax: (206) 386-1506 An equal employment opportunity af?rmative action employer. Accommodations for people with disabilities provided. The accounting technician Iposition that was open as a result of personnel leaving in March 2008; I had to take the lead from you and get that position into the interviewing stages. Conclusion These situations indicate that you may not be the appropriate person for your current position. I expressed concern about your interaction with staff and customers in an earlier memorandum. The use of ?transition accounts? to personally select and determine the buying and selling of an investment vehicle - yet continuing to report to me and the Board the name of the former manager also indicates more areas of concern: (1) your inability to multi?manage and to have re?invested the funds with other managers; (2) a desire to be a portfolio - manager and not a and (3) a blatant disregard for accurate reporting to me and the Board. All of these matters raise a question of trust and judgment. Please reSpond to the concerns raised in this memorandum including explaining your reason for not re-investing the funds for each transition account, as well as your reason for not renaming your line items when reporting to the Board. I will consider your response in determining my course of action and potential discipline. I realize you are scheduled for a two week vacation commencing June 9, 2008; therefore, please respond back to this memorandum by 2pm on Friday, June 5, 2008 and this matter can then be further discussed upon your return on June 24, 2008. City Employees? Retirement System, 720 Third Avenue, Suite 1000, l0?? Floor, Seattle, WA 98104-1829 Tel: (206) 386-1292, Fax: (206) 386-1506 An equal employment Opportunity affirmative action employer. Accommodations for peeple with disabilities provided.