Tobacco Facts.

AUSTIN — The Texas treasury lost $19.5 million through an investment in the Ponzi scheme run by convicted financial swindler Bernard Madoff.

The money was part of a $224.5 million investment the Texas Treasury Safekeeping Trust Co. had with a Texas-based hedge fund called Austin Capital Safe Harbor. Austin Capital closed in May because of losses it suffered in one of Madoff’s scam investment funds.

Comptroller Susan Combs chairs the Treasury Safekeeping Trust, which manages $50 billion in tobacco lawsuit settlement funds, TexPool investments for 2,000 local governments and Treasury Pool for managing state funds.

Combs spokesman R.J. DeSilva said Wednesday that the $19.5 million was written off last December after Austin Capital notified the state the money had been lost when Madoff’s Ponzi scheme collapsed. The treasury had been investing with Austin Capital since 2006.

While many state investment funds lost millions of dollars in value with last year’s stock market decline, the value could return once the market rebounds. But money lost to Madoff’s scheme is gone forever.

Though Austin Capital’s losses have been public for months, Combs’ office did not publicly acknowledge the losses by the state of Texas until contacted by the Houston Chronicle/San Antonio Express-News.

DeSilva said the state has taken no action to try to recoup the lost money. But he said state officials are monitoring lawsuits against Austin Capital and its parent company, KeyCorp., to see if there is a class-action lawsuit on behalf of investors. By law, he said, the state cannot join lawsuits brought by union pension funds.

The Austin Capital offices in Austin no longer have a working telephone. The company was owned by Key Bank of Ohio. Spokeswoman Laura J. Mimura said KeyCorp decided to “curtail Austin’s operations” in May after learning it had lost $186 million in investments with Madoff. She declined to discuss lawsuits against Austin Capital or the investments by the Texas Treasury Safekeeping Trust.
No mention of losses

Combs wrote an op-ed on Feb. 26 complaining that Madoff’s lack of transparency had caused investors across the United States to lose money but made no mention of her own agency’s losses.

“While there are no angry shareholders or investors to complain, we are accountable to the taxpayers who fill state coffers with their hard-earned dollars,” Combs said in her op-ed urging transparency in government.

A March 31 report of the safekeeping trust’s finances disclosed $205 million in investments with Austin Capital, but showed no losses.

In early February, the Massachusetts Pension Reserves Investment Management Board fired Austin Capital for the Madoff losses. Executive Director Michael Travaglini said the agency had $170 million invested with Austin Capital and suffered losses of $12 million. He said the agency is getting the rest of its money back through a liquidation schedule.

The firm’s slide into oblivion occurred quickly after Madoff’s scheme unraveled last fall.

Austin Capital had placed 7 percent of its portfolio with Treemont Partners Inc., which had half its $6 billion in assets invested with Madoff.

Lawsuits were filed in New York and Pennsylvania against Austin Capital to regain lost funds for labor union pension funds. Two lawsuits were filed in New Mexico in June.

One by a teachers union was filed on behalf of the state Educational Retirement Board and the State Investment Council. That lawsuit claims the two state agencies lost between $23 million and $25 million through investments with Austin Capital.

By R.G. RATCLIFFE Copyright Oct. 21, 2009 Houston Chronicle

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