Just over $600,000 of the village of Oak Park’s money is now frozen and in limbo because of alleged fraud involving a pooled investment fund that invests money for Illinois local governments.
The Illinois Metropolitan Investment Fund, known informally as IMET, invested in repurchase agreements in which the collateral turned out to be worthless. IMET’s Convenience Fund, which is a kind of money market fund for municipalities, has lost about $50 million because of the fraudulent repurchase agreements purchased. The repurchase agreements, known as repos, were represented to IMET as being backed by guarantees from the U.S. Department of Agriculture (USDA), but those guarantees turned out to be forged.
Over $50 million from IMET’s Convenience Fund was put into a restricted account on Sept. 30 to cover the loss. Oak Park’s share of that amount is $601,438, said Village Manager Cara Pavlicek, who noted that ultimately the village expects to get its money back as the IMET seeks to recover its investment in the repurchase agreements. IMET invested in the repurchase agreements backed by loans made by First Farmers Financial, a lender in Florida. In September, IMET learned that First Florida defaulted on the loans backing the repurchase agreements and that the USDA guarantees were forged, according to a fact sheet on the IMET website.
First Farmers CEO Nikesh Patel was arrested on Sept. 30 and charged with falsifying loan documents.
Pennant Management, a Milwaukee-based money manager, created the repurchase agreements.
Pavlicek said IMET and Pennant should have insurance to cover losses due to fraud and that IMET will seek to go after Patel’s personal assets to cover the loss.
“We expect to be made whole,” Pavlicek said. “I think the question and the unknown is the time frame in which both the insurance as well as the recovery occur, so it wouldn’t be unusual for this to take a significant amount of time. But we certainly don’t just say, ‘Oh well, we lost this money.’ That’s not an acceptable option. Those are the village’s funds and our expectation is that they diligently pursue their litigation and recover the funds and return them to us.”
According to an IMET fact sheet, “IMET is evaluating potential claims and recoveries against all potentially responsible parties involved in this matter.”
Oak Park used IMET’s Convenience Fund as a place to park short-term cash on hand. Just over $19 million was invested in IMET at the time. In the wake of the fraud, the village pulled all but the frozen $600,000 out of IMET and invested its money in the Illinois Fund, designed to help local governments invest their short-term cash balances. The Illinois Fund is run by the Illinois Treasurer’s Office.
Pavlicek said the village of Oak Park had invested funds with IMET since 2000, adding that she first learned of the problem with IMET on Nov. 10. She noted that the village’s finance director, Craig Lesner, learned of the problem on Nov. 5. Pavlicek notified the village board in mid-November. She made a public announcement about the frozen money at the Dec. 1 village board meeting to let the public know. The Nov. 17 village board meeting was already put together so she waited until the Dec. 1 meeting to make the public announcement.
The frozen $601,438 should not have any noticeable short-term impact on the operations of Oak Park village government.
“Our total municipal budget is $124 million, so when there are funds that are due but unavailable it certainly changes the financial position, but on a day-to-day basis, that’s a relatively small percentage of our total operation,” she said. “I certainly don’t want, in three or four years in an annual audit, to be taking a loss of $600,000. This is the public’s money. It is significant and it is important. As a percent of overall operations, it is a small percent, but it doesn’t mean it’s acceptable.”