Earlier this year, The Whall Group, of Auburn Hills, completed a forensic audit of some Orion Township investments at a cost of just over $26,000 to the township.
When the report was completed, it was believed that The Whall Group would also be giving a presentation to the board at a public meeting.
The Review has since been informed by multiple board members that the contract with The Whall Group did not call for a public presentation and that The Whall Group has no intention of giving one.
It had been the stance of this newspaper to allow such a presentation to occur before offering our report of their report. Since no presentation appears to be imminent, The Review now offers an in-depth look at the audit, five months after its completion?
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What happened?
The audit looked at certain investments in mutual funds that were made by the township beginning in February of 2005.
The township invested $8 million through broker-dealer Royal Alliance.
According to the audit report, these investments yielded an unrealized loss of $110,111.90 and a total income of $557,195.45 (in dividends, interest and capital gains), for a total return of $447,083.55.
A similar investment in the Oakland County investment pool would have returned over $100,000 more (or roughly made up the ‘unrealized loss? listed above), the report noted.
At the heart of The Whall Group’s investigation, however, is the role played by Treasurer Alice Young’s daughter-in-law, Diane Young, with whom the township signed a contract with in late 2004.
Diane Young was hired as a financial planner for a fee not to exceed $5,000 in a year. The board voted unanimously (Alice Young abstained) to hire Diane Young and The Athena Group on Dec. 20, 2004, as shown in their meeting minutes.
A Letter of Agreement was prepared by the township clerk, Jill Bastian, after the meeting. A second agreement, signed by both Bastian and Township Supervisor Jerry Dywasuk is the crux of the audit report.
The Financial Planning/Investment Advisory Agreement between the township and Invescor Advisory Services, Inc. a registered investment adviser represented by Diane Young, was signed on Dec. 22, 2004.
Part 3c of that agreement notes that, ?’adviser and or its related persons are registered representatives of Royal Alliance Associates, Inc., a registered broker/dealer ? Client is under no obligation to purchase or sell securities through Adviser and/or any of its related persons; however if Client does choose to implement any of Adviser’s advice and/or recommendations through said companies, Adviser and/or its related persons may earn commissions in additions to any fees paid for adviser services.?
The Whall Group’s report cites that this language was not believed to be what the board voted in favor of at their meeting, in spite of the signatures from the two full-time elected officials.
The report also notes that the meeting minutes refer to an agreement with Diane Young and/or The Athena Group, not Invescor Advisory Services, Inc. Each board member stated that they were unaware of Invescor Advisory Services, Inc. and the report said it is unknown how or why the change took place.
Not much thought was paid to the contract until the township’s internal auditor, Barb Armstrong, raised questions about the mutual fund investments in November of 2005, noting that they were losing principal in violation of township policy.
Shortly thereafter, it was revealed that Royal Alliance had earned over $60,000 in commissions on the mutual fund investments.
These factors started some internal investigations. Among other things, both Beth A. Baily, a CPA from Plante & Moran, and township attorney Kristin Bricker Kolb noted that the investments were legal per township policy, aside from the principal loss.
Correspondence from both, as revealed by the audit, also noted that the investments in mutual funds were illegal from February of 2005 through July 18, 2005, when the township amended its investment policy (after the fact).
The Whall Group’s report placed any potential blame for all of this at the hands of the board.
‘The relevant information was available, the failing here, if any, appears to be that the logical questions were not asked when the Proposal was presented or when the documents were received ? The Township Supervisor and Township Clerk signed an Agreement that was not voted on by the Board of Trustees. The Township Treasurer hired an investment broker (as distinguished from an investment advisor) that was not voted on by the Board of Trustees.?
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The contract’s break down
The report noted that the simplest explanation for the contract getting signed by township officials is that ‘there was clearly a break down in communication and a lack of questions surrounding these documents.?
‘The Township Clerk explains that she sent a copy of the Letter of Agreement, Proposal and Financial Planning/Investment Advisory Agreement to the Township Attorney and Township Insurance Agent for review. The Township Attorney denies receiving these documents. The Township Insurance Agent states that he cannot recall whether he received the documents in question. The Township Clerk states that she believes that the documents were all approved by the Township Attorney before she provided the documents for signature to the Township Supervisor. The Township Supervisor states that he relied on the Township Clerk to make certain that the documents were correct?? the audit reads.
In a memo to the board from March of 2006, Bastain claims that Kolb not only reviewed the documents, but she billed the township for 0.2 hours of her time.
She also stated that Keith Potter, the insurance agent, called the agreement ‘pretty standard.?
A Dec. 13, 2005 legal opinion to the board disputes Bastian’s claim: ‘Please be advised that neither the Letter of Agreement nor the Financial Planning/Investment Advisory Agreement were provided to nor reviewed by our office.?
The audit offers no opinion as to whether either the attorney’s office or the insurance agent did, in fact, receive the documents as Bastian claims. It does, though, say further investigation is warranted on this matter.
‘Concern has been raised that an additional audit needs to be completed regarding the events surrounding the Township entering into the Financial Planning/Investment agreement and the ensuing investments by the Township Treasurer.?
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The commissions
The report goes on to say that it is ‘not believed that any additional work need be done in terms of investigating the events surrounding the investments in question.?
The Whall Group said that the board should have ‘sufficient information? to make a determination whether they were fully informed by Diane Young ‘as to the nature of her proposed services.?
Andrew Nowack, on behalf of Royal Alliance, confirmed in the audit report that $60,138 in dealer concessions had been paid by the mutual fund company to Royal Alliance from Feb.-Nov. of 2005.
The audit states that, since the Financial Planning/Investment Advisory Agreement was signed, there appears to be no grounds for disputing the commissions.
Diane Young told The Whall Group that she ‘recommended to the Board that (she) work solely as a financial planner for a fee. However, the contract clearly states that if at some time the Client chose to utilize (her) services as a registered representative of Royal Alliance, then (she) may earn commissions. Providing such disclosure in an advisory contract is required and wholly ethical.?
Diane Young also noted that the treasurer, not her, had the responsibility for choosing the investments in question.
Alice Young, in an Aug. 21, 2006 report read at a township meeting, states that her daughter-in-law received commissions from Royal Alliance, not township tax dollars, and she received those commissions as a broker, not as the township’s financial advisor.
‘SOMEONE earns a commission every time an order is placed,? Alice Young wrote in a Dec. 19, 2005 memo to the board. ?’and that someone is the broker dealer. Some part of that is then paid to the broker.?
The agreement signed by the township notes that ?12b1 fees may be initially paid to Royal Alliance and a portion passed to the Advisory Representatives. The receipt of such fees could represent an incentive for Advisory Representatives to recommend funds with 12b1 fees over funds that have no fees or lower fees. As a result, there is a potential conflict of interest.?
With regard to who paid the commissions, this same section contains language referenced several times in the audit report, that ?12b1 fees come from fund assets, therefore indirectly from client assets.?
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What’s next?
The township requested a handful of recommendations in their initial RFP.
Among other things, The Whall Group report notes that the township should draft and implement a policy ‘that all contracts and other documents that purport to bind the Township into an agreement should be thoroughly reviewed by the party signing the document.?
The audit recommends that specific questions regarding documents be addressed to either the township attorney or insurance agent and that all questions and recommendations are put in writing.
Other recommendations suggest that a policy be put in place dealing with individuals that are related to township employees, that the accounting coordinator receive source documents for audit purposes and that the board review their own procedures in terms of investments.
Lastly, the audit recommends looking, for comparison purposes, into other investment opportunities (like the Oakland County Local Government Investment Pool) and that the Policy Manual should be reviewed and formalized to ‘provide a written guide as to how the Township is to operate. It is believed that in addition to other benefits, a written guide may alleviate some of the current discord between offices.?
Editor’s note: It should be noted that the Treasurer’s Investment Report, given to the board at Monday’s meeting, followed some of these recommendations and the trustees have routinely asked for contracts to be brought to the board for review since the audit began. Copies of the forensic audit were made available to the public in March via the clerk’s office.