Review points to due-diligence gaps in private equity investment

An outside legal review ordered by Alaska Gov. Mike Dunleavy has found that former revenue commissioner Adam Crum deviated from state policy and failed to perform required due diligence before committing millions in state savings to a private equity investment, according to the report.

The review, conducted by the D.C.-based law firm WilmerHale, said its investigation raised “significant concerns” about whether Crum met his fiduciary duties under state law. It also said Crum engaged outside lawyers to represent the state in the investment without obtaining approval from the attorney general “in apparent contravention” of state law, as described in the report.

The report said Crum’s process for selecting the DigitalBridge fund—along with two other private funds—did not involve rigorous due diligence. It further stated that Crum did not follow Department of Revenue protocols designed to assist him in meeting his fiduciary duties in connection with the investment.

Alaska’s Constitutional Budget Reserve investment

The state ultimately invested some $50 million from its Constitutional Budget Reserve with the private equity firm DigitalBridge, the report said. The investigation found Crum intended to invest $75 million with the firm.

According to the article, the investment came to light shortly after Crum left office to run for governor. The state later sold the investment to an Israeli insurance company and lost roughly $859,000, according to a letter sent to the House and Senate finance committees.

The letter said a portion of the $50 million that was not invested yielded $325,000 in interest, offsetting part of the loss.

No criminal wrongdoing found; legislative push follows

The review said it found no evidence of criminal wrongdoing or self-dealing. It also concluded that Crum had the authority as revenue commissioner to commit money to the private equity fund, but only if he had done the requisite due diligence.

Sitka Republican Sen. Bert Stedman said the investment was unsuitable for the Constitutional Budget Reserve and faulted Crum for breaking his fiduciary duty. Stedman said: “Clearly, this was an unsuitable investment for the (Constitutional Budget Reserve). No question about it,” and added: “The ex-commissioner broke his fiduciary duty to execute it.”

After the legislative session began in Juneau this month, Stedman introduced a bill that would bar the state from doing business with DigitalBridge.

Crum disputes the substance, but the report emphasizes process

In a phone interview, Crum said he tried to keep everything above board and characterized the investment as an effort to boost returns on the savings account while also spurring investment in Alaska. He said he stayed in contact with the Department of Law and the governor’s office about the investment.

Crum said he had multiple communications with the Department of Law and Treasury staff, describing what he characterized as attempts to confirm whether legal duties were met. He said: “I actually had multiple communications with (the Department of) Law, even with Treasury staff, trying to actually figure out what — I would send emails and ask the questions that say, have we met all of the legal duties in order to actually fulfill this?”

The investigation said Crum chose not to inform the governor’s budget office, the legislative auditor, or members of the Legislature as state policy requires. It said Crum wrote on a checklist for “non-routine investments,” which the state created after a 2015 investment misadventure, that “Treasury must not abdicate its statutory authority.”

The report also said Crum failed to inquire with the Department of Law about whether the investment met his fiduciary obligations under state law. Crum characterized the concerns as “procedural,” saying details were not his mandate as revenue commissioner.

He said: “It’s not about being technically proficient on all that stuff. It’s knowing the overall concepts,” and added: “That’s why you have staff. Otherwise, why do you have staff?”

Dunleavy issues administrative order after recommendations

The WilmerHale report included four recommendations aimed at avoiding similar issues in the future. As the report was released, Dunleavy issued an administrative order implementing many of the recommendations by adding additional checks on the revenue commissioner’s authority to invest in unconventional assets.

In the order, Dunleavy said the changes were intended to “enhance the transparency of investment decisions.”