Financial managers at Alden Global Capital didn’t need to go far when searching for a place to park a few hundred million dollars of pension funds held on behalf of news workers at The Mercury News and Denver Post.
In fact, the fund managers decided the best choice was right in front of them: They invested the San Jose and Denver pension dollars in high-risk hedge funds controlled by their own company.
Alden Global owns Digital First Media, formed in the cloud of mergers and bankruptcy reorganizations that brought together the former MediaNews Group and Journal Register newspaper chains.
A couple of legacy pension funds came along for the ride. Although the funds have been frozen, participants including retirees and vested employees at the Post and Mercury News depend on the pension’s assets — and have a legal right to expect the money is responsibly managed.
Now, public records show that the majority of workers’ pension funds at the two papers have been invested in funds controlled by Alden Global Capital.
Lawyers consulted by the NewsGuild say the investment choice appears to be legal, although they also note that it’s a questionable strategy given the risky nature of the investments, which are held in so-called vulture funds.
Alden itself warns its investors that these funds carry a high risk of default.
Alden is a privately held company founded by New York billionaire Randall Smith, who specializes in distressed businesses. Alden began taking control of the newspapers that would later become DFM in 2010, and has been drastically downsizing the chain’s newsrooms and operations ever since.
Hundreds of millions invested in Cayman Island funds
According to pension fund reports from 2015 (the most recent year on file at the U.S. Department of Labor), the two DFM newspapers had invested nearly $270 million of workers’ retirement monies in two Alden-owned entities.
Together, 85 percent of the employees’ $341 million in pensions were invested in hedge funds, with almost 80 percent invested in Alden.
The frozen plans cover 1,576 currents and former workers in San Jose and 1,812 in Denver, according to Form 5500 reports filed with the Labor Department.
The news workers’ pensions are invested in Alden’s AGBPI Fund Ltd. and its Global CRE Opportunities Fund. The AGBPI fund is based in the Cayman Islands, which has a reputation as a tax secrecy haven.
High risk versus big gains
Securities and Exchange Commission filings show that DFM’s pension monies made up early all of the AGBPI fund’s income in 2015. That year, DFM invested $236.4 million of the fund’s total $257.4 million. An SEC filing by Alden’s president Heath Freeman noted the fund had nine investors as of October 2015.
The CRE Opportunities Fund is based in Delaware. According to an Alden press release from November 2015, the CRE Opportunities Fund “currently invests in legacy commercial mortgage-backed securities (pre-2008) deals.” The parentheses appear to refer to mortgages made before the national subprime housing crash of 2008.
Alden portfolio manager Jamie Kelner said at the time, “We have a unique approach to this strategy and a strong platform and skill-set where every investment is looked at through an event-driven approach. We continue to see attractive opportunities and look forward to capitalizing on them.”
In plain English, Alden’s “event-driven approach” is characterized in company brochures as investments in financially distressed businesses and even countries such as Greece or Argentina.
These investments, popularly known as vulture funds, can bring in high yields but are considered quite risky. The online site Investopedia defines them as “risky debt instruments, where the chances for default is high.”
The pension investments struggled for the first part of 2016, but did deliver a good increase in value by the end of the year, the records show.
In the newspapers’ filings, the Alden funds are listed as “parties in interest,” meaning they are companies closely connected to people who manage the pension plans.
Party-in-interest transactions — where a company uses pension funds to buy property or corporate shares from anyone involved in the plan — are illegal under the Employee Retirement Income Security Act, or ERISA.
But in the DFM/Alden cases, the investments are permitted. That’s because the monies are not used to buy property directly from Alden, but instead are added to Alden’s “pooled investments” in other companies.
Tony Mulligan, who represents NewsGuild members at The Denver Post says DFM management has stated it plans to pull the pension’s funds out of one of the funds by the end of this year.
“I’m happy to hear that the pension trustees are diversifying the plan’s assets. Investing almost exclusively in their own hedge funds may be legal, but to me, it doesn’t appear to meet the trustee’s responsibility to diversify and act solely in the interest of the plan participants,” he said.