On the day it was publicly unveiled in March 2010, the North Carolina Innovation Fund was billed as a way to put the state's pension money to work as seed capital for a new crop of cutting-edge local businesses. As State Treasurer Janet Cowell described the plan, the new undertaking would invest a slice of the state's $90 billion pension fund in North Carolina firms that seemed poised for profitable expansion. 

If all went according to plan, fresh jobs would be created, taxpayers would gain a share of the spoils and North Carolina would shift toward a future defined by innovation while pulling away from the wrenching loss of textile and tobacco jobs. 

To underscore that transformation, Cowell made the announcement inside a restored textile mill in Durham. She stood next to Erskine Bowles, the former chief of staff to President Bill Clinton and a longtime financial industry executive.

But in the four-plus years that have followed, the North Carolina fund has emerged as an example of a different variety of innovation -- the financial kind. More than an artery of finance for startups, critics say, the fund has come to function as a private source of wealth for the savvy, politically connected financiers who have managed it, using it to capture lucrative slices of public pension money for themselves.

From its inception, the innovation fund was run jointly by Cowell and the multinational banking giant Credit Suisse. Within a year of its launching, a fundraiser for Cowell was held at Bowles’ home. Weeks later, the innovation fund awarded a contract to Bowles' firm, Carousel Capital, to manage some of the fund’s money. Only three days after that, Carousel filed documents with the SEC showing that the firm had paid Credit Suisse $775,000 for the bank’s work as a so-called placement agent in helping Carousel attract investment money.

In other words, in its role ostensibly protecting North Carolina taxpayers’ interests, Credit Suisse steered state pension money to a politically connected firm that was paying the bank to help it land pension deals.

Financial and pension management experts inside North Carolina and beyond now say the deal can be viewed as a particularly pungent example of the dubious role of placement agents -- intermediaries hired by private financial firms to help them secure fee-generating deals to manage public pension money.

“There is a very real risk that investment decision-making is corrupted by placement agent compensation,” former Securities and Exchange Commission attorney Ted Siedle said. Earlier this year he conducted an investigation for the State Employees Association of North Carolina that estimated that up to $65 million of the $230 million Innovation Fund has been spent on financial fees rather than on local entrepreneurs. “The public needs to be able to trust that investment decisions are being made on the basis of merit, but they can’t trust that when we know that there are politically connected intermediaries like placement agents involved in the decisions.”

Carousel Capital did not respond to International Business Times request for comment, and Credit Suisse declined to comment. Cowell’s office declined to address the specific transactions but released a 2012 letter in which Credit Suisse said the branch of its company overseeing the Innovation Fund did not communicate with its placement agents. A Cowell spokesperson told IBTimes that Credit Suisse was chosen to run the state’s Innovation Fund to “ensure that [the] investments were based upon performance and buffered from political influence.”

Still, the placement fee to Credit Suisse, which was not publicly disclosed until after the Innovation Fund deal was given to Bowles' firm, underscores the hidden conflicts that can be at work in public pension investment decisions. Those conflicts can be particularly pronounced in a placement agent business that has survived -- and thrived -- despite periodically facing law enforcement sanctions.  

Politically connected intermediaries

Financial firms hire placement agents not to create investment strategies, but to promote their services to investors, including public employee retirement systems. Placement agents can introduce their financial clients to state officials and help those clients pitch investments. According to placement agent Donna DiMaria, the job involves finding business leads, filling out requests for proposal, designing marketing materials and doing due diligence on financial firms seeking investments.

"As marketers all we really have is our reputation so we don't want to take a fund to market that will blow up in our face and hurt our reputation," said DiMarina, who chairs the Third Party Marketers Association, the trade group that represents placement agents. "When we come to market with a product, people know that we've spent a lot of time looking at it, making sure that it has real value."

Pension officials are bound by strict fiduciary statutes to base their investment decisions purely on financial considerations -- not political calculations or personal relationships. Yet one job of many placement agents is to leverage personal relationships to help their clients obtain pension investments -- regardless of whether those investments are the most prudent for the particular pension fund.

The lucrative placement agent business has drawn in an array of powerbrokers and celebrities who have little financial experience but who can open doors -- from Democratic fundraiser Eileen Kotecki to onetime New York Comptroller H. Carl McCall to former NFL star Lynn Swann.

The agents often get a cut of the total pension investment, which, on a typical multimillion-dollar deal, can run the fees into the six or seven figures. And, critics argue, those fees are ultimately paid by the pension systems.

"When you introduce a dispensable intermediary to an opaque financial transaction, there are always additional costs, and those costs are ultimately borne by the investors," said Siedle. 

From Blackstone to TPG to Credit Suisse, major financial institutions have simultaneously offered investment management services and placement agent services. The potential for conflicts is acute when financial institutions are providing both kinds of services in a single transaction. Companies hired by pension systems to provide objective investment advice could receive placement fees from the very firms to whom they direct pension money.

The inherent tension between fiduciary laws and placement agent services has led to high-profile corruption prosecutions in New York, California and Illinois. It has also led to felony convictions for some public officials. States such as California and Kentucky have passed laws -- over the objections of the placement agent industry -- requiring placement agents to register as lobbyists and disclose their activity. More recently, New York City Comptroller Scott Stringer followed New York State in banning placement agents outright in order to, in his words, "end the involvement of intermediaries in pension funds’ transactions [and] ensure that the integrity and independence of our investment decisions are beyond reproach and without conflict."

"Actual and potential conflicts of interest"

In North Carolina, managing the retirement savings of teachers, police officers, firefighters and other public employees is big business. As the sole fiduciary of the state's $90 billion pension fund, Treasurer Cowell, a Democrat, was recently named the world's 18th most important institutional investor by the Sovereign Wealth Fund Institute. The State Employees Association of North Carolina (Seanc) estimates that North Carolina is on track to spend a billion dollars a year of retirees’ pension money on fees to private financial firms. Roughly half of all North Carolina pension deals involve placement agents, and Seanc estimates that has generated roughly $180 million in placement agent fees -- costs that are effectively paid by the pension fund, according to critics.

Cowell recently instituted placement agent disclosure rules, saying in 2013 that she hoped “to be at the forefront" of a national effort to halt corrupting influences over pension investment decisions. Yet she presided over a North Carolina Innovation Fund deal that saw Credit Suisse move North Carolina pension money to a firm employing Credit Suisse as a placement agent.

The sequence of transactions began in 2010, when Cowell and Bowles, who was then serving as University of North Carolina president, appeared at an event announcing that Credit Suisse would manage a new $230 million pot of pension money to be invested in local entrepreneurs. Though Credit Suisse was already facing the federal investigation that led to its recent felony conviction, Cowell said the bank was chosen to oversee the fund "based on the breadth and depth of their financial expertise, their experience administering similar efforts in other states, and the fact that they already have significant operations in North Carolina." (Credit Suisse in 2014 sold its state innovation fund business to Grosvenor Capital Management.)

According to the terms of the agreement cemented by Cowell, the treasurer was to be kept abreast of Credit Suisse’s proposed investments and had the right to veto them.

Credit Suisse's own internal regulations say the company aims to "establish a management organization that avoids the creation or appearance of conflicts of interests." But the North Carolina agreement (the provisions of which were secret until Seanc’s open records request earlier this year) explicitly allows Credit Suisse to engage in "actual and potential conflicts of interest." The agreement noted Credit Suisse could receive “placement fees” from the firms in which it invests North Carolina pension money.

A little more than a year after Cowell hired Credit Suisse to run the Innovation Fund, the bank announced it was committing an undisclosed amount of Innovation Fund money to Carousel Capital, a private equity firm co-founded by Bowles and in which he is still listed as a senior adviser.

The investment was based on the Innovation Fund’s mission “to invest in companies with significant operations in or a nexus to North Carolina.” But days after Credit Suisse gave Carousel Capital the pension money, the firm filed SEC documents showing Carousel paid Credit Suisse $775,000 for placement agent services.

Over the next few months, Carousel listed Credit Suisse as a sales agent and paid more sales commissions to the bank. In 2012, North Carolina made a separate new investment in another Carousel fund, listing Credit Suisse as a placement agent.

A spokesperson for Cowell said that as part of that latter 2012 deal, the treasurer received “a commitment that prohibited business information sharing between the Credit Suisse unit managing the North Carolina Innovation Fund and the Credit Suisse unit that provides marketing services as a placement agent.”

Financial experts interviewed by IBTimes say that despite those assurances, what raises questions is not just the close timing of the Innovation Fund contract and placement fees, but also Carousel's relationship to both Credit Suisse and the North Carolina pension system.

Carousel had been managing North Carolina pension money since 2006, when it received a state pension investment without using a placement agent -- so the firm had a longstanding relationship with the North Carolina treasurer’s office when the new Innovation Fund investments were being awarded in 2011.  

"Carousel clearly already had the relationships and knew the players, so then why was it paying Credit Suisse a placement agent fee [in 2011]?" Andrew Silton, the state’s former Chief Investment Officer, told IBTimes. 

Cowell’s office released a 2012 Credit Suisse letter in which the bank declared that its placement agents working with Carousel have “not had any communications with individuals in” the Credit Suisse unit running the North Carolina Innovation Fund.

North Carolina’s state employees’ union has requested an SEC investigation into the fees paid by North Carolina, and into allegations that pay-to-play rules were violated when a fundraiser was held at Bowles home for Cowell just before the Innovation Fund invested in Bowles’ firm. (Bowles says his wife, not he, hosted the fundraiser.)

In response to news of Carousel paying placement agent fees to Credit Suisse just after the firm received Innovation Fund money, the union’s director of government relations, Ardis Watkins, said: “If it’s not illegal, it should be. Either State Treasurer Janet Cowell was asleep at the switch or she allowed it to happen.”

DiMaria of the Third Party Marketers Association said: "This absolutely raises red flags. If the pension fund had done their due diligence, they would have found this out in advance."

Credit Suisse is currently asking the federal government to waive sanctions related to its felony conviction that could prevent the bank from continuing to provide financial services to public pension funds.

Meanwhile, Cowell is reportedly considering launching a second innovation fund. But the placement agent disclosure rules she enacted in 2013 now prohibit the state from making new investments in any firm that currently manages North Carolina funds but still wants to hand pensioners’ money to “a third-party placement agent." So this time, Cowell would be barred from another deal like the one she oversaw in 2011.